What Happens to Your Credit Rating When Things Aren’t Going Well?

Navigating the Complexities of Credit Ratings: When Things Take a Downturn

In the intricate world of finance, a credit rating is an integral aspect that helps individuals and businesses move forward. The question, “What happens to your credit rating when things aren’t going well?” often arises when circumstances take a financial downturn. In this article, we will delve into the nuances of credit ratings, their implications, and the potential for recovery.

The Importance of Credit Rating

A credit rating is a powerful tool that can determine your financial future. It plays a key role in decisions related to loan approvals, interest rates, and even residential leases. A lower credit rating could mean higher interest rates due to the perceived risk for the lender.

Several elements contribute to the calculation of your credit rating and credit score, including:


  • Timeliness of payments;
  • Credit usage compared to credit limit;
  • Credit history duration;
  • Public records, like bankruptcy, and;
  • Number of lender inquiries on your credit report.


Understanding the Rating Systems

The Beacon score, also known as the FICO score in the U.S., is a familiar credit score system. It uses a scale ranging from 300 to 900. A score above 660 is generally deemed good, while anything over 760 is excellent. Scores between 560 and 660 are considered fair, and anything below 560 is viewed as poor.

However, credit reporting agencies like Equifax and TransUnion in Canada use more than just the Beacon score. They also refer to other systems to evaluate your credit performance for specific types of loans.

The Revolving Credit Score

The revolving credit score, denoted by a range from R1 to R9, indicates your performance with a revolving lender like a credit card company. In this system, a lower number is better.

The R-rating reflects your payment performance against the following criteria:


Payments are made as per the contract

Payments are 31 to 59 days late

Payments are 60 to 89 days late

Payments are 90 to 119 days late

Payments are more than 120 days late

Generally not used

Regular payments under a debt management option or a settlement

Asset has been repossessed

Debt is bad, in collections, uncollectible, or bankrupt


The Downward Spiral of Bad Credit

People with challenged credit reports are usually rated at an R2 or worse. If the debt situation has worsened to the point of being sent to collections, they may already be rated R9. Recovery from such a situation is often challenging and requires consistent large payments.

An R9 may stay on a person’s record indefinitely, even if they manage to make occasional payments. It’s not uncommon to see people struggling with their finances for years in such a scenario.

A Path for Recovery

Interestingly, formal insolvency proceedings like a Consumer Proposal or a Bankruptcy can provide a fresh start by settling or eliminating the debts and offering an opportunity to rebuild. If a debtor is already ranked at an R9, completing a Consumer Proposal will improve the debtor’s rating to an R7.

A Consumer Proposal is a formal debt settlement agreement with creditors that can help accelerate the path to debt freedom and the timeline to rebuild credit. It includes affordable zero-interest monthly payments, often amounting to less than the full balance owed.

Once the proposal is paid in full, the R7 will remain on the debtor’s credit report for only three years. Compare this to an R9, which may remain on a debtor’s credit record for up to seven years from the date of last payment.

The Subtle Differences Matter

Though lenders sometimes don’t distinguish between an R7 and R9 rating when assessing credit risk, an R7 rating offers a distinct advantage given the shorter timeframe it remains on a credit report after the proposal terms are satisfied. The sooner these negative ratings are removed from the credit report, the sooner one can rebuild their overall credit score.

The Road to Financial Recovery

A good credit rating can open the door to life-altering loans, secure favourable interest rates, and offer many life opportunities. Falling behind is often due to circumstances largely beyond one’s control. The good news is that it’s not a permanent situation, and there is help available for a financial fresh start.

Licensed Insolvency Trustees offer Free Confidential Consultations to review your financial situation and discuss your options. They can help you find the right strategy to recover from your financial setbacks and plan a better future. The road to recovery rarely includes quick fixes, but it does provide permanent solutions.

Remember the question, “What happens to your credit rating when things aren’t going well?” is not a life sentence. It’s a situation you can navigate and overcome with the right guidance and strategy.

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