Shedding Debt vs. the Credit Score
Of the two, which would you say is more important? Do you get rid of the debt so that you can effectively work on the credit score, or do you take care of your credit score, even if that means taking longer to pay off the debt?
For most of us, there’s a happy medium where we get to take care of our credit card debt and keep our scores in tact. However, I was reading some financial blogs today and realized there are readers out there who are struggling so much, but are afraid to seek credit counseling because they’re worried about what it would do to their credit scores.
While it’s admirable and definitely necessary to look out for your credit rating, having late and missed payments because you can’t keep up is far worse than seeking out credit counseling. If you absolutely cannot make the debt go away on your own, then it may be time to consider the idea of credit counseling.
For those who don’t really know what credit counseling entails, here’s how it works. You meet with a certified credit counselor who reviews your financial situation with you and then they help you determine the next steps. If you qualify for a debt management plan based on your income and expenses, then you will be allowed to make one monthly payment toward your outstanding debt with your creditors.
Meanwhile, your credit counselor is working with your creditors to reduce interest rates, bring past due accounts current, and anything else that will help lighten your load. When you enter into a debt management agreement, creditors close your accounts that are included in the program and notate your credit report as such. The FICO scoring model doesn’t take the notation into account, so that’s not what affects your credit score when you seek credit counseling. What affects your score is the fact that several accounts have been closed out. Depending on the length of time that those accounts had been opened will determine how much your score drops.
But, it’s important to understand that even that will not hurt you as much as missed payments can. Remember, your payment history accounts for 35% of the score while the length of history only accounts for 15%. Paying your bills on time every month is more important. Therefore, my opinion for those having to choose between cutting some debt and losing points on their credit score is to cut some debt. You can do more good for your credit report by getting rid of that debt and coming to a place where you can comfortably meet your obligations.
A good credit score is obviously important. I’m not suggesting that you run out and close every credit card you have. However, if you can’t meet your debt obligations yourself, then seek help from a credit counselor. Get the debt under control before you totaly ruin your credit. A small drop in points for closing some cards to get your debt paid down is infinitely better than a plummeting score because you can’t manage the debt properly.
Time is of the essence with this right now, too. Because of the industry-wide changes that are taking place, if you’re planning to speak with a counselor, you should do it soon. Since lenders are tightening the purse strings a little, they’re less likely to make deals with the credit counselors. One of the benefits of credit counseling is they are usually able to negotiate deals that cut debts in half or lower interest rates to the point that it gets the debt paid off much quicker. But, because of the number of defaults, lenders no longer have that discretionary power. They need the income, so the deals are less appealing to consumers.
When it comes right down to it, paying off the debt should be your number one priority. You credit is important, but it’s much easier to increase your credit score once you’ve gotten rid of the debt. If you have to choose, then I recommend choosing the debt first. Please note that this post is in reference to choosing between debt and your credit score…I still think it is important to build an emergency fund first, lest anyone thinks I might have contradicted myself.
What are your thoughts on this? Have you been in a position to choose? Is there really a choice in your opinion?
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I’m probably not in the best position to give advice, but my priority is getting the debt in order. However, in my experience, working with a debt counselor for credit card consolidation wasn’t a very good deal. The consolidator wanted to charge me $40 a month that I didn’t have, and would only have been able to reduced the interest rates on two of my accounts. One account actually would have a HIGHER rate.
So, like a politician we all know, I said “Thanks, but no thanks.”
Also, I would warn people that the credit counseling industry is funded by the credit card companies, whose interest is in reducing their losses, so counselors may try to set up payment plans with higher payments than debtors can afford.
One last point–some places that advertise themselves as debt counselors are out-and-out scams. So be careful.
What I think does work is negotiating individually with the credit card companies. Keep asking, even if they say “no” at first.
Just my 2 cents.
To be totally honest, I just assume I have a good credit score. I have always paid everything on time and have had a existing credit line. My main concern right now is paying off my debts. I am trying really hard to the point where I have removed all the credit cards from my wallet. I have even cut back on paying large chunks of my student loans just to throw more money at my darn CC debt. It is going well but I will be happy when it is gone, once it is at ZERO I will check my credit score! Ill let you know how that goes!