Opening Credits
Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.”
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‘Opening Credits’ stories
Dear Opening Credits,
Over the short span of my adult life so far, I have managed to open a lot of credit cards, adding up to just under $10,000 of debt. In the past year, I have struggled — between a pay cut and a breakup — to even make minimum payments on each of my cards. I decided to enter into a hardship settlement, feeling that it was my only choice to reach a lower-debt lifestyle. The payments have come within my reach, and I am finally able to make ends meet. Now I am freaking out about my credit score in the long run. (It was already low to begin with.) Did I make a mistake by doing this? How long will these accounts show up on my credit history as “paid for less than amount due”? — Stephanie
Dear Stephanie,
It looks like you’ve made a number of credit mistakes, Stephanie, but there’s no reason to freak out. Each is fixable. Here are the three main problems, as well as what you need to do to solve them.
Problem No. 1: Opening too many credit accounts. Ah, this is a common one. Sounds like you applied for credit randomly, causing your wallet to burst with plastic. It also resulted in the ability to charge and (temporarily) live far beyond your means. Without enough cash to pay for what you wanted, those open lines of credit probably made buying what you couldn’t afford too easy.
Solution: If you have any active lines of credit left, review them and decide on a couple that you want to keep. They should be accounts with the lowest interest rates and other favorable terms. Tuck the others away in a safe place, or if you feel you can’t control overspending, close them entirely. In the future, only apply for the credit you require and won’t abuse. The average person needs just a couple of accounts — a general purpose credit card that you can use anywhere, and perhaps a retail card at a store where you regularly shop.
Problem No. 2: Letting debt escalate. A $10,000 total liability is not unusual, but it’s a hefty sum for one person to repay quickly. You know this now, but while you were using the credit cards, you needed to have kept your eye on the ball (er, bill). Certainly you didn’t get to that figure overnight, and the moment you discovered it was getting out of control you should have stopped charging and focused on repaying the balance.
Solution: When you do use credit again, you’re going to have to make sure your debt never gets out of hand again. To do that, always check your balance before charging. If you know you’ll have enough money to pay for everything you charge in full without neglecting your essential expenses, great — go for it. If not, put the card away.
Problem No. 3: Reneging on your contract. It’s not clear if you arranged a hardship program though a qualified credit counseling agency, or if you used a debt settlement company to negotiate the balance down. If it’s the former, your creditors will probably report you as delinquent, since you’re not making the originally agreed-upon minimum payments. On the other hand, if you are settling the debt, you will also see credit damage because you are paying less than the total owed. It will be notated on your credit report as “settled,” which is much less desirable than “paid in full.” Why such damage? You’re reneging on a contract. When you got the credit card, you promised to pay according to their terms. When you don’t, you get dinged.
Solution: If you are using a hardship plan, resume minimum payments again as soon as possible. In the event you’re with a debt settlement company, the accounts have likely gone into collections, so you may as well continue and get the financial break. The prescription for both of these scenarios is basically the same: Wait for notation to age — after seven years, the negative information will drop off the reports (and after a couple years it will become considerably less important) and start to use credit responsibly now. By charging regularly, and paying on time and in full, you’ll establish a positive credit history as you’re waiting for time to work its magic.
You are on your way to a fresh start just by taking an interest in your finances. After reparations, make a commitment to wise money and credit management so you never go through this again.
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