A Dirty Rag is a used Ripped Sheet/Rag that has been used to treat a wound and has expired and no longer has any bandage power capability and has turned into a Dirty Rag.
A injury covered with a dirty rag has a higher chance of becoming infected than a clean Ripped Sheet and even less with a Sterilized Rag.
When cleaned with water the dirty rag returns to a regular Ripped Sheet and regains its bandage power. However, considering the sheer availability of Ripped Sheet materials ingame, its more economical to save the water.
If a bleeding wound is left untreated, the player will slowly lose health and will eventually die of blood loss. Open wounds also have a good chance of becoming infected. Bandaging a wound stops bleeding completely, and if the player consumes enough food, the player will start regaining health (depending on the type of injury), and the chance of an infection is reduced while bandaged.
It is in the player's best interest to remove a dirty rag and reapply a clean one to lower infection chance. (a regular infection, and not to be confused with Zombification, which is irreversable).
Clean Dirty Rag or Bandage (depending on which was used)
No crafting level required.
At all times, even when you think you are safe, keep a few Bandages or Ripped Sheets on your character. Unexpected injuries can be dangerous if left untreated. Keep a few more backup Bandages or Ripped Sheets in your stronghold so that you can treat injuries if you run out of bandages or Ripped Sheets you brought with you.