In Canada, more and more clients are coming to credit counselling seeking debt consolidation though a debt management program (DMP).  A sticking point though is the fear having R7 ratings on their credit report for 2-3 years after their debts are paid off.  Typically, we have the same conversation with clients and explain how in most cases having R7s is misunderstood.

What is an R7 rating?

Each account on your credit report is given a rating.  The ‘R’ stands for revolving credit and this generally means a credit card.  Other prefixes exist, but are not worth mentioning here.  Here is the full list from Equifax:

People typically tend to hear the ratings as a scale from bad to worse.   1 being the best and 9 being the worse.  Although true for the far ends of the spectrum, let’s compare R7 to R5:

R5 means the account is unlikely to be unpaid and is almost ready to be declared a bad debt.  The account is delinquent for at least 120 days and in most cases, probably more.  The debtor has probably stopped answering phone calls and opening letters from the creditor in the hope that the debt will just ‘go away’ with time.  The account is ready to go to a collections office with the hope that someone else with have more luck.

Now the R7

R7 means that the client is paying or has already paid the account back with some assistance.  Assistance in our case, a Debt Management Program designed to for debt consolidation so the debtor pays a reduced monthly payment with interest relief.  The client has realized they are in financial trouble and called out for help, because they want to pay back their debts. R7s last on your credit report for only 2-3 years after you have completed payment.

So if you were a creditor and two prospective clients came to you asking to borrow money, one had an R5 and the other had completed a DMP, but had R7s, which would you prefer to business with?

If you are thinking about going to credit counselling consider these points:

• Credit card debt of $30k will take around 20-25 years of minimum payments to pay off.  Credit counselling lasts for 54 months max and you are debt free.
• Debt Consolidation typically saves you thousands of dollars.
• What could you do with the monthly payment amount once the DMP is completed?
• Talk to a couple of different counsellors and figure out what is best for your individual circumstance.