How do I know what is the best course of action for me when it comes to a bad credit report?

Let us assume for the sake of this article that you have bad credit. You have a couple of things in collection, a few charge offs, some late payments and a repossession for that washer and drier a few years back.

But in the last couple of years things have finally started to go right for you and now you are in a position where you feel you can afford to buy a house. Life is good and you are determined to keep it good. So you get your free annual credit report to see how much longer you are going to have to wait before you can apply for a loan. And the good news is that it is going to be relatively soon. The bad news is that it is going to be at least three years. So you are considering a credit restoration. But is this really the right course for you? Credit restoration can cost anywhere from $500 to $1000. And that price could even double if you have to include your spouse.

So let’s take this step by step.

When you look at your report you notice that there are two items that are going to fall off your report next month. There are a couple that are about two years away from falling off and a couple that are three years away. The ones that are going to expire next month have low balances that you could pay off in a couple of months. The other accounts have all been turned over to collection agencies. So now you need to form a plan of attack. How do you handle these accounts in the way that will benefit you most?

You have made the debts; you are obligated to pay them until they are legally discharged either through bankruptcy or the companies who own the accounts write off the account as a loss. But, is it really worth doing so? The answer is NO. It is actually better in some cases to let the debt go. Here is how you can tell if it is time to let the debt go or make the payments to get it paid off.

The first thing to do is determine if the account is still active. You do not want to contact the collection agencies who purchased the account. There are two reasons you don’t want to do this. One is that ALL BILL COLLECTORS LIE ALL THE TIME. Now previously the only other group of people that I have heard this statement about is convicts. This is a terrible thing to say but the fact is it’s their job to scare you into paying the debt. If they told you the truth, you would know that there is nothing to be afraid of and you will delay paying the debt. Most bill collectors work on commission so they have to do whatever it takes to get you to pay the debt. This means that the only thing they are going to tell you is that you have to pay the debt. This brings us to the second reason why you don’t want to contact them.
You may not have to pay the debt. It is entirely possible that the account has been discharged by the granting company and written off for a tax break or maybe even an insurance business loss claim. If this has happened, the collection agency is no longer legally able to collect on that debt. So, why is this a problem? Refer to reason one. They WILL lie to you about the debt. Since there is absolutely no oversight on this aspect of debt collection, they can tell you that you owe the debt even if you don’t. They can get away with this because they are not obligated to tell you if the debt has been written off. So why take the chance of re-activating the account and having to put up with harassing phone calls and nasty threatening letters. As a general rule of thumb, if the collection agencies have stopped contacting you, it is likely that you have fallen off the radar. Do yourself a favor and stay off the radar.

What about the accounts which are active? Remember, in this scenario, you have no assets like a house. So the absolute worst thing that can happen to you if you don’t pay the debt is that you will have your wages garnished. In order for this to happen, you have to be sued by the granting company and a judgment placed against you. Then the granting company has to try to collect on the debt again. If that fails they have to go back to a court and have a Judge order your wages garnished. It usually never goes that far. Most companies use bluff and bluster to scare you into payment after the judgment but if you still refuse to pay, they charge it off of their books and collect from their insurance companies, or they write it off on their taxes.

But, if you follow this route, your credit is ruined because that one account has caused a lot of damage. You have 30-60-90-120 day late payments, a collection and a judgment all from that one account. SIX negative items from you being too stubborn to pay what you owe.

So you might try to obtain a small high interest loan to satisfy those debts that they are still trying to collect on. There are banks and financial institutions out there who will work with you.

And finally, determine if it is worth waiting for another three years for your credit to be clean on its own. Are you happy with your neighborhood, the kid’s schools and other considerations? Do you want to move out to the country? Are you tired of the commute? If you can be satisfied with waiting the three years for the credit to clear on its own, then that is what you should do. But consider this, if you wait, and something negative happens within that time, you will have to wait longer and put off your dream again. But, if you clean your credit and get into a house, when that negative thing happens, there are more options available to you because you are a real property owner. Without the real property, you are just another credit score and not a very good one at that. It’s not just your future, it is your children’s future too. Plan with care.