Debt Settlement, Counseling and Your Credit Rating

When looking at your different debt settlement options, the impact each effort might have on your credit rating is no doubt top of mind.

"There's a feeling out there with the Canadian public, generally speaking, that your credit rating is one of the most important things on the planet," says Richard Cooper, president and CEO at Total Debt Freedom Inc. "The truth is it doesn't matter what you do, what debt relief program you sign up for, it's going to have an adverse affect on your credit rating."

That said, he adds this: "A credit rating is really like a rose garden and your debt is like a house. If your house is burning down, do you really care if the fire department is destroying your rose garden with their hoses?"

Liked this article? Don't miss another one. Follow us on Twitter or Facebook.

Cooper points out that debt settlement is not for everyone: Your ratings will slide, creditors will call and send your debts to collection agencies and the really litigious ones can and will sue if you default on what you owe.

So what, exactly will these efforts do to the records about you on file at TransUnion and Equifax Canada?

"Some of these debt management groups are focused solely on negotiating reduced payment plans, without regard to the potential impact on a consumer's credit report. Before a consumer starts deferring or making reduced payments on a debt, they should make sure they have a clear understanding of how that will be reported to the credit bureaus," says Cliff O'Neal, senior director of corporate communications at credit reporting agency, TransUnion.

Credit reporting agencies use codes to report your credit history. In short, "I" stands for credit issued on an installment basis, "O" means open credit such as a line of credit where you borrow as needed and "R" is short for revolving credit. Credit cards fall into this last category. According to Industry Canada, the R rating system, also known as the North American Standard Account Ratings, are the most frequently used. Here's how your debt management actions (or inaction) gets reported:

North American Standard Account Ratings
R0	Too new to rate; credit approved but not used.
R1	Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2	Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
R3	Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
R4	Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5	Account is at least 120 days overdue, but is not yet rated "9."
R6	This rating does not exist.
R7	Making regular payments through a special arrangement to settle your debts.
R8	Repossession (voluntary or involuntary return of merchandise).
R9	Bad debt; placed for collection; moved without giving a new address or bankruptcy.
Source: Industry Canada.

How long do these factors affect your credit score?

The following charts from the Financial Consumer Agency of Canada show how long it takes (in years) before information is removed from TransUnion and Equifax credit reports:

TransUnion Canada	Provinces
	BC	AB	SK	MB	ON	QC	NB	NS	PEI	NL	Terr.
Credit transactions (from first date of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Judgments	6	6	6	6	7	7	7	6	10	7	6
Collections (from first day of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Secured loans (from the date opened)	5	5	5	5	5	5	5	5	5	5	5
Bankruptcy (from discharge)	6	6	6	6	7	7	7	6	7	7	6
Registered consumer proposal (from the date satisfied)	3	3	3	3	3	3	3	3	3	3	3
Credit counseling settlement (from the date satisfied)	2	2	2	2	2	2	2	2	2	2	2

Equifax Canada	Provinces
	BC	AB	SK	MB	ON	QC	NB	NS	PEI	NL	Terr.
Credit transactions (from first date of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Judgments	6	6	6	6	6	6	7	6	7 to 10	6	6
Collections (from first day of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Secured loans (from the date opened)	6	6	6	6	6	6	6	6	6	6	6
Bankruptcy (from discharge)	6	6	6	6	6	6	6	6	6	6	6
Registered consumer proposal (from the date satisfied)	3	3	3	3	3	3	3	3	3	3	3
Credit counseling settlement (from the date satisfied)	3	3	3	3	3	3	3	3	3	3	3
Source: Financial Consumer Agency of Canada.

Related:
What is Debt Settlement?
Debt Settlement or Credit Counseling? (Coming soon.)
The Degrees of Insolvency (Coming soon.)

Liked this article? Don't miss another one. Follow us on Twitter or Facebook.


Kate McCaffery is a freelance writer in Toronto, Ontario. Visit mccaffery.ca/kate2.0/ for more information.