Editorial Policy

Repay old debts before taking on new ones

Erica Sandberg

February 25, 2016

Q  Hi Erica,

I just paid some credit card bills because they were in collections. It was ruining my credit, and I could not get another credit card because of that. I told my mom what was going on, and she loaned me the money to pay off my card debts. Since then, I pulled my credit reports and found that all three card debts are still in my credit file, and my scores didn’t even go up a point. Now I owe my mom $1,200. I’m only 20 and a student, so I’m not working. What can I do now? My mom is bugging me nonstop. Thanks for your help. — Jeff

A  Dear Jeff,

Oh, how I wish I could have intercepted this play. If so, I would have blocked your mom from making a big mistake. Sorry to be so harsh, but you were clearly a poor credit risk when she lent you the money. Worse, you still are and will continue to be if you don’t change the way you’ve been dealing with your obligations.erica-box4

You have a history of not paying your creditors, and you don’t have an income. These are the two factors any institution or individual should assess before offering a loan to anyone. That’s why you’re having trouble getting a credit card. Issuers are looking at your credit file and the financial data on your application. Based on the information you’ve supplied, they’re smart to take a pass.

The good news is that you’ve paid what you owed to the collection agencies. I doubt that the bills were very old because you’re quite young. Recent dings carry greater credit scoring weight, so if they happened within the past few years, it’s no surprise that your credit score is bad. When you didn’t pay your debts, the issuers sold them to collection agencies. Collection accounts, even when paid off, will appear on your credit report for seven years. A paid debt, though, does look better than an unpaid one.

As for your credit reports, you might not have waited long enough before checking them. It’s possible that the scoring system hadn’t taken your paid-off debts into consideration. Wait another month and check again — you may find the numbers have increased.

You also may be looking at older versions of your credit scores. The original FICO and VantageScore scoring systems don’t give much of a credit score increase for a satisfied collection account, but the newer versions do. The latest FICO and VantageScore models remove collection accounts from the mix when the balances have been repaid. Not all lenders are using the updates systems but eventually they probably will.

You did the right thing in paying your creditors; now do the same for your mom. She’s expecting $1,200, and that’s exactly what you need to give her.

Start by getting a job. The vast majority of college students work while enrolled. For example, if you land a barista position at a campus cafe, you’ll likely earn at least $10 an hour, after tax and with tips. Working 12 hours per week would net about $480 a month, which is what you should send regularly to your mother. In a single semester you’d be in the clear and have paid off her loan. Or you could send her a portion every month until she’s paid off — just establishing a regular repayment plan should make her happy.

After that, keep earning and saving, as it will help you become eligible for a secured card. With a secured card, you can restart your relationship with lenders. A secured card requires a few hundred dollars (fully refundable when the account is closed with no balance due) as security and in exchange will offer a credit line similar to that sum. Charge a little, pay on time and in full, and your secured card will increase your credit score. As long as your secured card reports your payment history to the credit reporting agencies — call and ask if it’s not on the secured card application — you’ll be repairing past damage.

It’s time to make your mom proud, Jeff. Make good on your debt to her.

Got a question for Erica? Send her an email.

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