Coping With Credit Problems

When you’re managing debt that includes some combination of mortgage, car, and student loans as well as the balances on two or more credit cards, even a small financial emergency or a brief bout of excess spending can spell trouble. And usually credit card debt is impacted first.

Not only do you find yourself charging more, increasing what you owe using one of the most expensive ways to borrow. You take advantage of the option to pay only the minimal balance due—a choice you don’t have with loans.

If the interest rates on your cards are in the 20% or higher range, the cost of carrying a balance can balloon very quickly, compounding your problem. And it can get worse if you’re late with payments and face fees of up to $40 a time.

Red Flags

The most effective way to handle evolving credit problems is to recognize the danger signals, not ignore them:

• Your debts, including your mortgage if you have one, are more than 40% of your monthly income.
• You’re making only the minimum payment on your credit cards.
• You’re skipping some payments entirely every month.
• You’ve borrowed up to your credit limit on one or more of your revolving credit accounts.
• You’re using savings or investment accounts to pay
• your monthly bills.
• You’re putting off essential medical or dental treatment.

Unless you can increase your income or cut your expenses, you could end up in a situation from which it’s difficult to extract yourself.

If you default, your income tax refund can be withheld to pay your debts and your wages can be garnished, which means a percentage of your paycheck is withheld to pay your creditors. It’s not only embarrassing and leaves you even shorter of cash, but it could affect your job security or chances of promotion. You could also be responsible for paying court or collection costs.

Being Proactive

If you owe more than you can repay, ask your creditors to change the terms of your credit agreements. They may agree to add the amount you are behind to the end of a loan, reduce your monthly payment, or both. This approach will extend the repayment period and cost you more in finance charges, but it may keep you from drowning in debt.

And don’t wait too long to act. In many cases, including most mortgage loans and student loans, it’s possible to work out repayment only if you have not defaulted. Information about possible remedies for repaying federal student loans is available at www.studentaid.gov. For mortgage issues, begin by checking with your lender or loan servicer. The servicer is the bank or other organization to which you make payments.

You may want to seek professional help from an accredited credit counselor who can help create a payment plan. You need to be careful in selecting someone to work with, as qualifications vary. Before you choose, be sure you know the kinds of advice the counselor will provide and what the service will cost. You may want to search online to see if any complaints or other problems emerge when you type in a prospective counselor’s name or agency affiliation.

You can also check with the National Foundation for Credit Counseling (www.nfcc.org) or the Financial Counseling Association of America (www.fcaa.org) for a referral in your area.

One Loan from Many

In some cases, you may want to investigate loan consolidation. In that case, you take a new loan large enough to pay off your existing debt, so that you owe just one lender rather than many. But unless you can confirm that the cost of the new loan will be less than the combined costs of your existing loans, you may be facing greater hardship.

The interest rates and fees on consolidated loans tend to be high, especially since you already have damaged credit. And some loan consolidators impose a large pre-payment penalty if you want to pay off the debt early.

The one place consolidation may make the most sense, and is apt to be reasonable, is with federal student loans that you take directly from—and consolidate with—the government.

Beware of Scams

The consequences of unpaid debt can be severe, damaging your credit report and potentially limiting your ability to find a job or arrange a loan to buy a home or a car. The negative information remains on the report for seven years, and longer in some cases. Once the card issuer closes—or writes off—your account, you may be pursued by debt collection agencies, who can be extremely persistent in harrassing you to pay what you owe.

Unpaid debt can also open the door to scammers who claim to be debt collectors, offering you unsolicited help resolving your debt. Often these callers demand an upfront fee. The goal is collecting as much money as they can from you, with little if any actually going to repay what you owe. Worse yet, they may exaggerate what you owe, invent loans that you never took out, or revisit loans you have already paid off.

Other scammers may promise, again for an upfront fee, to negotiate with your creditors to resolve your debt or help you to qualify for a government program that forgives credit card debt—though no such programs exist. In these cases, the money you pay is lost forever, and does nothing to reduce your debt.

While there are legitimate debt settlement and debt management programs, they don’t guarantee a successful resolution, especially if the debt is substantial and likely to take many years to pay off.