ADVISORY COLUMN: PERSONAL FINANCIAL ADVISOR
QUESTION: I had an unpaid credit card, and now it’s not at an amount that I’m able to pay in one lump sum or in installments. I received a letter from a collection company and am trying to contact the bank for their recommendation. What’s your recommendation?
– Mr. Powell
FINANCIAL ADVISOR: My recommendation is that you immediately engage with the collection company. When the debts reach the stage of yours, this is what is required. The debtor has discussions with the debt collector and makes payments to the lender and the lender forwards the payment information to the collector.
When a lender assigns a delinquent account to a collector, the collector calls and the debtor responds by meeting with the collector to make arrangements to settle the debt. The collector will examine the debtor’s situation and ability to pay so that they can both come up with a plan for the satisfactory repayment of the debt, plus the collector’s fees.
The payment does not have to be a lump sum, but the intention is that the debt be repaid as soon as possible. The collector tends to consider the debtor’s position but also considers the lender’s desire for on-time settlement, but prompt settlement is very important in situations where interest is still accruing on the debt.
Although the goal of debt collectors is to settle debts, they do not all work the same. Some take a softer and more flexible approach than others. The choice of the collector is not up to the debtor. It is the business of the creditor.
If the debtor succeeds in eliminating the debt, that’s good. Otherwise, other measures enter into force. In some cases, a bailiff can be engaged, but if all else fails, legal action is taken.
Bad debts have a negative effect on credit scores and thus reduce the borrowing capacity of the defaulting borrower. If possible, it would be worth getting a loan to liquidate the bad debt. Before taking this step, it would make sense to check with the credit bureau to determine what your credit rating is.
As soon as you have paid off the debt, you should ask for a letter stating that it has been settled so that the creditor can return it to the credit bureau. The debt will stay on your credit report for seven years from the time it is paid off, but over time you can repair your credit score.
You mentioned that you are not able to pay a lump sum or pay in small amounts. A lump sum doesn’t mean 100 percent of the amount you owe, but if you don’t have a lot of money now, you should start to consider how much you can pay for the debt won’t go away, and card debt. credit is not cheap. I am sure you have recognized this harsh reality from your experience.
I mentioned earlier that you might consider a loan to pay off this loan. It’s such a shame that you didn’t contact the credit card issuer when you started having trouble paying off the debt. Chances are you could have gotten a loan to pay off your credit card debt.
I don’t know how your situation came to be. My readers who present credit card debt situations tend to blame their problem on inexperience and ignorance of how credit cards work.
Many users of such cards do not seem to consider the interest rate to be high, that paying the minimum monthly sum does not really help as it tends not to reduce the debt as it may be lower than the interest charges, that the amount owed might increase even with monthly payments, and that interest is charged on the full amount owed when full payment is not made.
Credit cards make the best sense when used for convenience, that is, when they are used in such a way that the cardholder can spend without having to use checks or cash and be able to pay in full on or before the due date. When so used, the holder pays no interest.
It is important to use credit cards with caution because the future can be so uncertain. Job loss, illness, and several other issues can affect your ability to pay off debt without notice. Go ahead and chat with the debt collector, the sooner the better. It will take some painful adjustments to generate funds to make the payments, but you can bounce back.
Oran A. Hall, lead author of The personal financial planning manual, offers personal advice and guidance on financial planning.