ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
QUESTION: I had a credit card that wasn’t being paid, and now it’s not at an amount I am able to pay in a lump sum or in instalments. I have received a letter from a debt-collection company, and I’m trying to reach out to the bank for their recommendation. What is your recommendation?
– M. Powell
FINANCIAL ADVISER: My recommendation is that you engage with the debt-collection company immediately. When debts reach the stage yours has, that is what is required. The debtor has discussions with the debt collector and makes payments to the lender and the lender passes on payment information to the collector.
When a lender assigns a delinquent account to a collector, the collector call, and the debtor responds by meeting with the collector to make arrangements to settle the debt. The collector will look at the debtor’s circumstances and ability to pay so that they can both arrive at a plan for the satisfactory repayment of the debt, plus the collector’s fee.
The payment need not be a lump sum, but the intention is that the debt is paid off in the shortest possible time. The collector tends to consider the position of the debtor but equally considers the desire of the lender for settlement in good time, but a quick settlement is very important in situations in which interest is still accruing on the debt.
Although debt collectors set out to effect settlement of debts, they do not all operate the same way. Some do take a softer and more flexible approach than others. The choice of debt collector is not for the debtor to decide That is the business of the creditor.
If the debtor succeeds in eliminating the debt, that is good. If not, other measures come into effect. In some cases, a bailiff may be engaged, but if all else fails, legal action is taken.
Bad debt has a negative effect on credit scores and thus reduces the ability of the delinquent borrower to borrow. If possible, it would be worth getting a loan to liquidate the bad debt. Before taking that step, it would make sense to check with the credit bureau to determine what your credit score is.
As soon as you have satisfied the debt, you should request a letter saying that it has been settled so that the creditor can deliver it to the credit bureau. The debt will remain on your credit report for seven years from the time it has been paid off, but as time passes, you can repair your credit score.
You mentioned you are not able to pay a lump sum or pay in small sums. A lump sum does not mean 100 per cent of the sum you owe, but if you do not have much money now, you should begin to consider how much you can pay for the debt will not go away, and credit card debt is not cheap. I am sure you have recognised that harsh reality from your experience.
I mentioned earlier that you could consider a loan to pay off that loan. It is such a pity you did not reach out to the issuer of the credit card when you started having difficulty servicing the debt. It is likely you could have secured a loan then to pay down the credit card debt.
I do not know how your situation came about. My readers who present credit card debt situations tend to blame their problem on lack of experience and ignorance about how credit cards work.
Many users of such cards do not seem to consider that the interest rate is high, that paying the minimum monthly sum does not really help because it tends not to reduce the debt as it is possible that it could be less than the interest charge, that the sum owing could increase even with monthly payments being made, and that interest is charged on the entire sum owed when full payment is not made.
Credit cards make the best sense when used for convenience, that is, when used in such a way that the holder can spend without having to use cheques or cash and is 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 carefully, for the future can be so uncertain. Job loss, sickness, and several other matters can impair your ability to service your debt without notice. Go ahead and have a conversation with the debt collector, the sooner the better. It will require some painful adjustments to generate funds to make the payments, but you can bounce back.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.