Lenders view our financial reliability through the lens of a credit rating. This is because our rating determines creditworthiness. An R3, for example, may indicate the inability to manage debt effectively.
Here, I will answer the question, “What is R3 credit rating, and why does it matter.” In doing so, we will review the broader R rating system in Canada, comparing R1 vs R9 ratings. Regardless of your ranking, don’t worry – you can improve your credit score.
What is R3 credit rating?
If a borrower has an R3 credit rating, it signifies they make payments on their credit accounts BUT these payments have been made with a delay. Specifically, an R3 rating means payments are between 60 and 89 days late.
The significance of an R3 rating lies in its impact on credit scoring. Unlike an R1 rating reflecting timely payments, an R3 can lower your overall credit score.
R ratings on credit reports
The R rating system in Canada is a way to evaluate a borrower’s creditworthiness. Their score is based on payment history. Each classification outlines how reliable the borrower is in fulfilling their financial commitments.
- R0: No payment history (ie. new or unused accounts)
- R1: Indicates a timely payment history within 30 days of the billing date. This is the best credit rating in Canada.
- R2: History shows payments are made 31 to 59 days after billing.
- R3: Payments are 60 to 89 days overdue. This represents a single delinquent payment and evidence of financial strain.
- R4: Overdue payments by 90 to 119 days.
- R5: Payments are 120 days late with three missing.
- R6: Rarely used in practice.
- R7: Represents a special repayment arrangement such as consumer proposals or debt management plans. Often, this rating is for agreements that have a reduced payment schedule.
- R8: Indicates insolvency. In some cases, it may include repossession.
- R9: Denotes a “charged-off” account or bankruptcy.
What R3 means on credit reports
Borrowers are 60 to 89 days overdue on payments if they have an R3 rating on credit reports. This shows they have fallen behind on payments. It is a “beware” signal to other potential lenders because an R3 negatively influences your credit score. It makes securing loans and favorable interest rates more challenging.
Now, you may be wondering, “How long does R3 stay on credit reports?” And it’s a good question – an R3 rating may last up to six years from the day of your most recent transaction or payment. But it depends. The exact time frame depends on whether you continue to make timely payments. Also if the account becomes inactive.
I recommend monitoring your credit report and maintaining positive financial habits to help mitigate the long-term impact of an R3.
Drawbacks of R3 credit rating
Having an R3 brings significant disadvantages. This is because lenders see an R3 rating on credit reports as a sign of potential financial instability. Thus, they will classify you as a higher-risk borrower. Often, this results in less favorable lending terms, making borrowing more costly. That is, IF you can get a loan at all because an R3 results in a lower overall credit score, possibly preventing you from securing new loans.
How to improve your credit score from R3 to R1
It is possible to change an R3 credit rating. I know, this is a relief! Here are some tips to change R3 to R1:
- Make on-time payments. This is the most critical step. To rebuild your credit history, ensure you do not miss a bill and remain consistent in your payments.
- Communicate with your creditors if you are struggling to make your payments. Many will work with you to set up a practical repayment plan.
- Reduce your credit utilization. Strive to maintain a credit utilization ratio below 30%.
- Check your credit report. Monitor your credit report for inaccuracies or mistakes. Disputing any inaccuracies can help improve your score.
- Limit applications for new credit. Avoid applying for multiple credit accounts simultaneously, as this can temporarily lower your score. Focus on improving your current accounts first.
Once you achieve an R1 rating, the key is to maintain it by continuing to make timely payments. I also recommend managing your credit responsibly.
Options for debt relief and recovery
If you’re facing challenges due to an R3 credit rating there are several debt management options that can help. Here are some strategies to consider:
- Credit counseling services: Work towards eliminating your debt, taking advantage of the services offered by a credit counseling agency. These organizations provide personalized guidance and can assist in creating a budget or negotiating with creditors. They also specialize in developing repayment plans.
- Debt consolidation: This option allows you to combine multiple debts into a SINGLE loan. Possibly with a lower interest rate. By consolidating your debts, you can simplify payments and potentially reduce your monthly expenses. This can be particularly helpful in preventing your R3 rating from worsening to R5 or lower.
- Need more resources? See our review of the Best Debt Consolidation and Relief Programs/Companies in Canada 2024
- Consumer proposals: A consumer proposal is a formal agreement with your creditors to pay back a portion of your debt over a set period. This option can relieve overwhelming debt while protecting you from more severe consequences, such as an R9 rating on your credit report.
- Debt management plans (DMPs): DMPs involve working with a credit counseling agency to create a structured plan for paying off your debts. The agency engages in discussions with your creditors to (potentially!) lower interest rates and monthly payments. This makes repayment more manageable.
Conclusion
Understanding credit ratings is essential for managing your financial health. If you have an R3 rating it indicates you are behind on payments by 60 to 89 days. It serves as a warning to lenders and impacts your credit score. This rating can influence your borrowing potential. A R3 may also result in higher interest rates and challenges in getting approved for new loans.
Fortunately an R3 is not forever – you can greatly improve your credit score from R3 to R1. Consider prioritizing timely payments and taking advantage of available debt relief options. Resources like credit counseling services and debt consolidation can also provide support on your path to recovery. Because recovery is possible, one step at a time.
Lauren has over 13 years of experience in wealth management and financial planning. She is a CFA charterholder and holds a Bachelor's degree in Finance. Lauren has worked with several asset management firms, offering wealth advisory and portfolio management services to high-net-worth clients.
