Top Credit Questions: Dealing With Difficult Debt

August 31, 2010

Top Credit Questions: Dealing With Difficult Debt

Facing debt is an issue most consumers can relate to, especially the financial and emotional toll it can take. For these tough issues, Credit Karma members reach out to each other to figure out how to deal with difficult debt through the Credit Advice Center:

Would like to know which one hurts your credit score worse: making house payments and letting the credit cards go late, or letting house payments go late and paying off credit card debt. We are at the point of letting our house go and trying to salvage credit, so we can purchase a house later. Asked by rnchopper2

This is truly a difficult situation, and I’m sorry you’re faced with such a hard decision. In fact, you’re one of far too many Americans contemplating this tough choice, with many of them choosing to a href=”http://www.marketwatch.com/story/more-people-skipping-mortgage-to-pay-credit-cards-2010-03-05″ target=”_blank” rel=”nofollow”>forgo mortgage payments in order to pay their plastic. But before you jump on this bandwagon, let’s take another look.

Since you are most concerned about salvaging credit, consider the consequences. If you default on your credit card payments, it’ll show up on your credit report after 30 days, and after 90 days your credit card is in danger of being closed by your credit card issuer. This will affect your payment history as well as your credit utilization, ultimately impacting your credit score. If you default on mortgage payments for a prolonged period of time, you are in danger of losing your home to foreclosure. Foreclosure will utterly wreck your credit score, plus it leaves you without a roof over your head. A closed credit card and outstanding debt is pretty bad for your credit report, but a foreclosure is one of the worst black marks to have. Check out the damage points of both.

While letting your credit card payments go will hurt your credit score and risk canceling your card, letting your mortgage payments go leaves you without a home and a foreclosure on record. In these tough times, prioritize your finances according to what is most important and necessary. After that, rebuild your credit with a secured card and re-establish good payment history over time. Best of luck to you.

Is it better to make payments towards a collection balance or two make a settlement at a lower rate? Asked by Ashtex12

I was in the same situation. I decided to settle–it’s better than letting the credit remain unpaid. One year later I was finally able to begin rebuilding my credit (more responsibly, of course), and one year after that my credit score is 769. It can be done–good luck to you. – abflex

Paying the settlement is worse for your short-term score, but better for your long-term score. The account is a problem account as long as it is there…–phnxangell

I think paying the whole balance in installments is better because it looks better on your credit that your paying the monthly balance on time…however I’m in that situation too…–TinyB

I’ve heard that after 7 years the debt goes “away” but what happens when a debt collector sells the debt off to another collection agency? Asked by Ninny413

The 7 years is for reporting but has nothing to do with its legal status. For example, a credit card will have a statute of limitations to file suit of 3 years I believe in California but an auto loan will have a SOL of 15 years in Ohio. It depends on your state and the type of debt…–camalott4

The debt is still valid after 7 years, and companies may still pursue you to get paid…–phnxangell

These are called junk debt buyers. They buy your old account as part of a portfolio for pennies on the dollar, they try to collect for the full amount of the old debt, usually plus interest… The more savvy you are about your legal rights in this matter, the better…–free4ever

Stop by the Credit Advice Center yourself to post your own credit question or post some smart answers of your own!

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