When credit problems pile up, it's time to reassess
By Erica Sandberg
January 28, 2016
I've got some big problems with my credit. I needed to clean up my credit because I had a credit card account that was sold to NCO, a debt collector. I was unemployed and couldn't pay for my car, so the bank took it back. That cost me $2,900. I got a secured card, but I'm unemployed again, so the bank took my money. My credit score is 422. Is there anything for me today? — J.M.
You might be able to get a credit card now, but I don't know who would approve you for one. Nor do I think you should get one. You've borrowed a lot of money that you failed to repay, and not just once but a few times. You either don't know how to manage credit products wisely or you are choosing not to do so.
If you're unclear on the process, no worries. Here's what you need to know:
When you do business with a credit card company, each party has a specific task. The issuer's is to facilitate transactions. The card issuer allows you to charge up to a fixed sum so you can pay for something without using your own funds.
As a cardholder, your role is to repay the issuer as per the terms outlined in the initial contract, which are pretty simple — pay at least the minimum amount requested by the due date. Fail to do this and trouble ensues:
- The issuer will report the delinquency to the credit reporting agencies. The first delinquency will appear as 30 days late, the second as 60 days, and so on.
- Credit scores are developed from the data on a credit report, so if you're late on payments, your credit scores will decline. Presuming you cited the FICO score, which ranges from 300 to 850, yours are close to the bottom, and that's an indication that you're a bad credit risk.
- If a card is secured by cash, the issuer will claim the money held in deposit and close the account. You won't owe more unless you borrowed more than what you deposited. If there is an outstanding balance, that amount will appear on your credit reports as a debt.
- If you're 180 days late paying on your credit card, the issuer will charge off the account, meaning it has declared a loss. The charge-off notation — a clear indication that you have not paid your account — will appear on your credit reports for up to seven years.
- Collection agencies may buy charged-off accounts and try to get you to pay. NCO is one such agency. These companies also send information to the credit reporting agencies (Experian, TransUnion and Equifax), further damaging your credit rating.
When you borrow money for a car, the lender fronts the cash for your purchase. You agree to make the monthly payments on time. The vehicle is collateral, so if you don't follow through, the lender can reclaim the car. When that happens, the car is sold at auction. You owe a deficiency balance when the car is sold for less than the outstanding loan balance. Your credit rating will take another hit when the lender reports the amount owed to the credit reporting agencies.
Now that you understand what you need to do to keep these bad things from happening to you and your credit, you have to make a decision. Are you ready and able to adhere to the rules? If not, stop using credit products. Not everyone can handle loans and credit cards. There's no shame in that! A cash-only existence is limited, but it's better than reneging on financial obligations.
In the event that you're ready to turn over a fresh leaf, you'll have to take pains to deal with the past and change the future. Secure a steady job. You'll have to do that anyway, because you'll need to cover your living expenses. Repay your debts, as quickly as possible. The collectors will come after you if you don't.
Your credit rating will rise as you pay off your debts and the negative marks fade into the reporting distance. When you're in the black, check your scores again and apply for the credit card that matches your rating. Start with another secured card, and use it the right way: Always pay your bill in full and before the due date. That positive activity will be reported to the credit reporting agencies, and in due time, your credit reputation will be repaired.