Chapter 8
Generally, people are pretty good about paying their bills on time and managing their credit. According to the Internet Web site www.myfico.com:
Fewer than 4 in 10 consumers have ever been reported as 30 or more days late on a payment.
Only 2 in 10 have ever been 60 or more days overdue on a credit obligation.
Fewer than 1 in 10 have had a credit account closed by the lender.
These promising numbers are balanced by other, more broadly-defined, analyses that suggest higher levels of consumer debt will eventually lead to higher delinquency and default numbers.
Through the 2000s, there has been steady unease among economists about these higher debt levels making credit problems a big issue. So, in this chapter, we’ll consider the warning signs that lenders look for and what happens when people get behind in their credit debt.
Banks, lenders and credit bureaus look primarily for late payments or delinquencies as a sign of financial trouble. In short, delinquencies are reports that lenders make to credit bureaus when a borrower falls 30 days or more past due on a scheduled payment for a credit account.
Delinquencies are measured in 30-day units. If a credit card payment is due January 1 but you haven't made it within a few days of February 1, there's a fair chance that your credit card company will report a 30-day late notice to the major credit bureaus.
If you haven't made the payment by around March 1, the credit card company will almost certainly report a 60-day late notice to the bureaus. And, if you haven't made the payment by April 1, the company will report a 90-day late notice.
Lenders and credit bureaus also track payments that go later than 90 days. But most finance companies lump all seriously late payments in a "90-days-or-more" late category.
So far in this chapter, we've been talking about problems with nonsecured debts-money you owe credit card companies, department stores, student loan companies, etc. Nonsecured lenders are often more flexible about working with people who are having financial problems because they have to be (their loans are only as good as a borrower's ability to pay) and because they charge relatively high interest rates.
More than any single problem, lenders and credit bureaus are on the lookout for trends that suggest borrowers are heading for trouble. They believe that, if they see broader signs of a "downward spiral," they can make better decisions about granting credit...or how to respond when a borrower asks for help. Credit bureaus are constantly modifying their reports in an effort to spot trouble sooner.
Credit card companies often seem to encourage some level of kiting, since they advertise balance transfers, cash advances and devices like so-called "convenience checks" that make moving debt from one card to another easy.
This shuffling of debt can be smart money management, if you're taking advantage of low promotional interest rates, etc. And, as we've noted, even credit counsellors suggest moving credit card debt around to avoid maxing out any one card.
From the last two case studies, you can see that bankruptcy cases define a lot of the rules about how credit card debt is handled by courts. But many people have a too-casual attitude toward bankruptcy.
Declaring personal bankruptcy should be considered the path of last resort (although some lawyers will tell you otherwise to get your business). In most situations, bankruptcy will damage your credit rating so severely that you won't be able to get credit of any sort for several years. There are some situations in which bankruptcy can improve an extremely poor credit rating-but these are rare.
After a debt is discharged in a bankruptcy proceeding, you can still choose to repay it. This is known as debt reaffirmation—and it can have some good effect in your credit rating, much like getting a reinstatement on a foreclosure or paying a charge-off (though a reaffirmation doesn’t have quite as positive an effect as those other cures).
Reaffirmation agreements must be filed with the bankruptcy court. To be approved, they:
should be undertaken voluntarily;
must be in your best interest; and
must not unduly burden you or your family.
Some credit card issuers and retailers have begun approaching consumers after their debts have been discharged by a bankruptcy, pressuring those consumers to reaffirm their debts—in exchange for issuing the bankrupt people new credit cards.
If you have declared bankruptcy, you do not have to reaffirm any of the debts that were discharged. And, while reaffirming may improve your standing with a particular creditor, it has only a minor effect on your credit. A better strategy for improving your credit is to pay all of your non-discharged and new debts in a timely manner.
While some credit card issuers will try to get consumers—often unwittingly—to reaffirm a debt that was defaulted on when they apply for new credit cards, these companies cannot force you to reaffirm a debt that was discharged via a bankruptcy.
In this chapter, we’ve considered the main credit issues—black marks and red flags—that lenders look for when they’re considering a loan or reviewing an account. There’s a big difference between one 30-day late payment and bankruptcy; but both items affect your credit score badly.
Credit bureaus and the lenders they serve are secretive about the specific effects that one or two late payments…or a charge-off, etc.…will have on a specific person’s credit score. But we do know that credit bureaus are constantly trying to improve their abilities to spot trends. They want to see “downward spirals” when they’re just beginning.
As a smart consumer, you should be on the same lookout in your own finances. The best advice that we can offer from all of this black mark information is: If you suspect you’ve got money troubles brewing, contact your lenders while your payments are still timely. Let them know you’re going to need some help.
And keep as much as you can in writing.
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