Salvaging My Credit

March 30th, 2010 |

Salvaging My Credit
The Dollar Stretcher Blog
by Gary Foreman

I quit paying ALL of my CREDIT CARDS ACCOUNTS because I may have to file bankruptcy???!!! BUT I have several charge offs on my credit now!! What should I do? Pay the collection agency which I heard, was NOT the way to go!! Does a collection agency report to the credit report paid in full if you try and pay off the balance owed?? Or should I just file bankruptcy? PLEASE HELP!!!! Thank you!!!
B.

Sounds like B is freaking over her credit card bills. She’s right. She is in pretty deep. So panic might be the appropriate response!

Let’s dial down the emotional volume. We’ll begin by learning about credit scoring and then offer some possible alterantives for B.

The most widely used credit scoring system today is by Fair Isaac and Co. You’ll hear it referred to as your FICO score. Fair Isaac won’t reveal the formula they use, but they will say that 35% of your score is based on payment history.

That history includes reports by lenders of late payments and partial payments. B has lots of company. According to Fitch Ratings, 4.5% of all credit card accounts are 60 days late. That’s a lot of people on the edge of panic!

There are a couple of different ways that your debt can be described on your credit report. “Paid as agreed” is the best and means that you’ve kept up your share of the agreement with the credit card company. “Paid” means that you had problems, but did pay what was owed. “Settled” means that you came to an agreement with the lender for something less than the whole amount owed. “Charged off” means that the lender was unable to collect the money owed.

What has happened so far with B? She doesn’t say specifically, but we’ll make the assumption that this started when she couldn’t afford to make her monthly payments.

At that time she should have contacted her lenders or a credit counseling. Often they can work out a payment plan that’s affordable and will prevent further damage to your credit score. Either one of two national organizations can point you to an agency. The Assoc. of Independent Consumer Credit Counseling Agencies (866-703-8787) or The National Foundation for Credit Counseling (800-388-2227)

Because B quit paying her bills the credit card companies hired a collection agency and charged off the account. That charge off shows on B’s credit report.

B has four options at this point. She can ignore the bills and make no attempt to repay or resolve the problem. Naturally her credit score will be badly damaged. She can expect to find it very difficult to borrow money for at least the next 7 years. She may also have some trouble renting an apartment or finding a job. Sometimes landlords and employers check credit scores.

The second option would be to contact a credit counseling agency. They may still be able to work out a payment plan. She would be required to pay back the amount she borrowed, but interest rates and fees would be lowered. At the end of the program her credit report would show those items as “paid.”

A third choice would be to negotiate directly with the lender or collection agency. If she pursues this any contact should be in writing. Refuse to negotiate by phone. The lender may be willing to accept less than the amount owed. In that case her credit report would show the account as “settled.”

Her final option is bankruptcy. That would discharge her debts. But, B may be required to give up her home or car to help pay creditors. Accounts included in the bankruptcy will show that way on her credit report for 10 years. But, that might not be all bad. Chances are that most of them were already late.

There are pluses for your credit score if you declare bankruptcy. Because debts are discharged in bankrupty, the amount you owe drops dramatically (another ingredient of your score).

Also, if you declare bankruptcy, your FICO score will be determined by comparing you to other people who have filed bankruptcy. That could help you to score higher.

What should B do? That will depend on how much she owes, her ability to repay it and what the lender is willing to accept. Her best bet is to start with a credit counseling agency. If they can’t work out a program B will be left to choose between negotiating with the collection agency and declaring bankruptcy.

Keep on Stretching those Dollars!
Gary

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Gary Foreman is the editor of The Dollar Stretcher.com website and various enewsletters. Visit the site for more info on charge offs.

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