Editorial Policy

Paying debt won't immediately undo credit damage

Erica Sandberg

November 22, 2013

QDear Erica,

I have $3,900 on my credit card that I have not paid in more than one year. My credit is ruined, obviously. If I pay the debt off now, will my credit be better right away, or will it be bad for a long time? The stress is killing me, Erica. It's nonstop. My mother said she would loan me the money to pay the debt off instead of me going bankrupt, because I just got a job. — Vince

AHi Vince,

Before making any decision about your finances, you must stand back to view the problem objectively. You owe a relatively small sum, and it is not the end of the world. Focus on problem-solving.

First, know who you're dealing with. Chances are high it's not your card issuer any longer. Just as fresh milk spoils when left on the counter for too long, credit accounts go bad, too. After 180 days of nonpayment, the bank would have either sued you for the balance due or sold it to a collection agency. Since you don't mention a judgment, they did the latter.Ask Erica

I bet you've been getting some rather pesky, demanding calls. If so, they are probably the source of your stress. To alleviate that, know that the Fair Debt Collection Practices Act protects you against abuses from third-party collectors. If collectors are harassing you by calling many times a day, in the middle of the night, swearing at you or threatening arrest, they are breaking the law. When you speak with them again, explain that you understand your rights and responsibilities and that should stop the behavior. Also know that you don't have to talk with them.

That doesn't mean you should ignore your debt. Collectors can sue you, which is the last thing you want because it will only worsen your troubles.

I'm not opposed to your mom helping you out of this jam, as long as you repay her. If you can, write out a contract together that stipulates what your payments will be and when you'll make them. As long as you're working, you can give her monthly installments.

Contact the collector and say you are ready to pay the debt off. Request a final bill with the exact amount you owe to be mailed to you, then send that figure with a USPS return receipt. While you may be able to arrange a debt settlement (which means you pay off your debt for less than you owe), I don't suggest it. You seem to be concerned about your credit rating, so full payment is better. Besides, if you borrowed that sum (and agreed to the finance charges that were inevitably added) that's what you ought to pay. Keep all correspondence with the collector in case of confusion. After about 30 days, check your credit reports to make sure it reflects the zero balance.

As soon as your report indicates a zero balance, your credit score should improve. It won't undo the damage already done, however. You were delinquent on your account, and it went into collections. Payment history is the most important FICO score factor. As long as that negative information is being listed, your score will be affected. Late payments are included in your credit reports for seven years from the date of delinquency; collection accounts are listed seven years from the date the debt was charged off. However, recent activity is more important, so the older those mistakes get, the less severe the credit score damage. If you begin to borrow from another creditor and repay consistently, you'll also have positive information reported. That will eventually overshadow the ding until it's eventually removed from your credit reports.

Regarding bankruptcy, that process is reserved for people who can neither now nor in the future repay their liabilities. In exchange for a formal cancellation of debts (Chapter 7 bankruptcy), you'd have a tarnished credit report for 10 years. Being anxious isn't enough of a reason to file. It has to make sense and be your last resort. Unless you have other pressing obligations that you didn't mention, I'm going to say you're not a candidate.

Above all, be honorable with your mom. While she won't be able to send your history of steady payments to the credit reporting bureaus (thus helping your credit), your personal credit rating with her will rise. And that's more valuable than any report or score.

Got a question for Erica? Send her an email.