Your credit report is something that stays with you for your whole life, documenting your financial habits and informing your potential future creditors how likely they are to be repaid if they lend you money. It can influence whether or not you get a loan and the rate at which your loan will be issued, along with many other financial decisions. Understanding what is included in your credit report is an important life skill that is often not taught, and must instead be researched on your own. To help eliminate surprises when you’re ready to make a big financial decision, we’ll explore the R rating system that you may see on your credit report. It is associated with each of your revolving credit accounts and changes based on your payment habits.
"R” refers to revolving credit like a credit card, where you have a credit line that you borrow against each month and then repay only the amount that you use. The R rating reflects your repayment history for revolving credit accounts. There is also the “I” rating for installment loans, like a student or mortgage loan. Once you pay off what you owe for an installment loan, the account closes, unlike revolving credit that resets so you can borrow again. If you don’t pay your mortgage bill on time, your collateral, often your home, will eventually be used as payment. This won’t happen with revolving credit, which is most often unsecured debt, or money borrowed without collateral set up as back up payment.
You may see a number and letter combinations ranging from “R0” to “R9” on your credit report. “R0” means your creditor does not have enough information, or history dealing with you, to rate how well you repay loans. With time, this rating will change. “R1” is the rating you should aim for. It means you pay your bill on time. Anything above an “R1” rating means you have missed a payment. The higher the “R” number, the longer your delinquency is.
If you see an “R9”, your creditors have charged off the debt after many months of non-payment. If you are able to resolve the debt, or settle it through restructuring, your “R” number does not go back to “R1”. Instead, it will go down to “R5”, and that’s the lowest it will ever go for that account. You will have a separate “R” number for each account, influenced only by your timeliness on paying off that account. One “R” value does not influence another “R” value, so failure to pay one bill will not affect another account’s rating that is paid on time.
Like always, the best thing you can do for your credit report and resulting credit score is to pay your bills on time. Whether that involves strict budgeting or setting up auto pay, you need to find a system that works best for your situation. All of your credit report headaches can be avoided with on-time payments. If that is not possible for one bill or many, you’ll start seeing the effects on your credit report, like an “R” rating that is not an “R1”. If enough time has passed for you to consider restructuring your debt, that is a viable option for improving your “R” rating. It won’t completely absolve you of your missed payments record, but it will improve your rating to an “R5”, which is much better than having an “R9” listed. It shows creditors that you negotiated with your lender to come up with a solution to your missed payments. To begin this discussion, use Kredit to get in touch with your creditors and start working on a deal to appease both parties.
Since paying off the debt completely and restructuring it will yield the same results, do not hesitate to pursue a settlement agreement. You’ll save money and will still end up with an “R5”. Even if you are sued over a debt and resolve it through a repayment plan, you’ll still see an “R5”.
The more you know about your credit report, the better you can tackle life’s financial situations that arise at each new stage. While paying your bills on time may prove difficult, understanding how late payments can affect your credit score, and financial future, could help you reprioritize to meet an upcoming goal.