Debts rising? It’s time to cut spending

Dear Liz: You’ve made it clear that we should try to keep our credit card balances to no more than 30% of the credit limits. Many of us haven’t been able to do that because we’ve needed to put charges on or take cash advances from credit cards while we’ve had no work, so 50% was the revised goal. However, if still more charges or advances have to be done, is it better to still spread them around so that all credit cards are over 50% but below 60%, or is it better to just “max out” one card and keep the rest of them under 50%?

Answer: How about plugging the leaks that are causing your financial ship to sink, rather than musing over how much water you can take on before you’re swamped?

Steadily growing credit card debt is a clear sign it’s time to make changes to get your spending in balance with your current income. That’s because carrying credit card debt is simply too dangerous to your financial health and can lead you straight to Bankruptcy Court. It’s too easy to see something as a “need” and charge it, rather than make the tough decisions to cut back on what you can no longer afford.

For credit scoring purposes, it’s better to spread out the balances. For life purposes, it’s better to stop charging.

Big debts mean you can’t afford your life

Dear Liz: I have always carried more debt on credit cards than I should have. However, I have always been responsible in making payments. Before the economic crisis, my credit scores were around 780 and I had all the access to credit I needed. But my lenders have slashed my credit lines and closed accounts. Suddenly I find myself using 90% of my available credit, not because I’m spending more but because my credit lines have been reduced. Last I checked, my scores were around 690, and I haven’t had a late payment in more than seven years. Now with interest rates so low, I would like to refinance my house (that I am underwater with), but that seems impossible with this new “credit reality” for me. What is my best course of action? And no, I can’t just pay off all my credit card debt without a significant lifestyle change such as putting the kids back in public schools, eliminating vacations, etc., which I am not willing to do at this time.

Answer: If you can’t pay off your credit card debt, you can’t afford your current lifestyle.

You never could, really, but that fact was obscured by loose lending practices that didn’t punish you for carrying big credit card debts. Times have changed, and you need to change with them.

Carrying credit card debt has always been foolish, of course. It’s expensive and a signal that you’re living well beyond your means. Furthermore, as you’ve learned, you’re vulnerable to the changing whims of credit card companies, and those whims can have serious effects on your perceived creditworthiness.

Paying down your balances may not boost your credit scores right away if your lenders continue to slash your available credit — an industry practice known as “chasing down the balance.” But you need to do so anyway to free yourself of this toxic debt.

Your problems refinancing aren’t just due to your scores, in any case. Your current scores won’t necessarily prevent you from refinancing (although you would get a higher interest rate than if they were 740 or above). Your bigger problem is the fact that you owe more on your loan than the house is worth. You could explore the federal government’s Home Affordable Refinance Program at http://www.makinghomeaffordable.gov to see whether you qualify for an underwater refinance; otherwise, you’re probably out of luck.

Don’t stick your head in the sand about debt

Dear Liz: I just got a letter from a collection agency saying I owe a phone carrier $498 for an ISDN line I thought I had terminated two years ago. I had no idea about this outstanding amount because we moved and the carrier didn’t get my forwarding address. I can’t find any hard evidence that I closed the account, and so much was going on then (I was expecting our first child, my father was dying and our landlord decided to sell the apartment) that I’m terrified I could have screwed up. We are otherwise always responsible with money. I’ve been too scared to check my credit reports, but I dread to think what this has done to my credit scores. I’m in a position to pay in full immediately, but I want to try to have this expunged from my credit reports if I can do so. My other concern is that if Verizon doesn’t think I terminated the account, could it have been billing me all this time? Is it the tip of the iceberg?

Answer: The chances are slim the carrier continued to bill you after turning this account over to collections. So your first assignment is to pull your head out of the sand and see whether this collection account has appeared on your credit reports. Torturing yourself with worry about what’s happening to your credit is worse than simply knowing. Go find out.

Once you do, and you realize you’re still breathing, you can get started on the next steps.

Understand that you may well not owe this debt. Plenty of people have been dunned for accounts that were properly closed and paid in full. That’s why it’s so important to hang on to your last statement, showing a zero balance, from any creditor, utility or other biller — it can quickly short-circuit bogus debt collection efforts.

You’re not out of ammunition because you don’t have your last statement, however. Federal law requires the collector to provide proof, once you ask for it, that this is actually your debt. Make your request in writing and send it certified mail, return receipt requested. If the collector can’t provide such proof, it’s supposed to stop collection attempts and delete any mention of the debt from your credit reports.

If the debt is yours, you can begin negotiations to either delete it from your credit reports or prevent it from showing up, if the collector has yet to report it. Get the collector’s promise in writing before you send any money.

Debt doesn’t disappear after lender write-off

Dear Liz: About two years ago, I bought a new car but was lied to about how much it would cost. After a year I simply could not afford the car and could not refinance as I was incredibly upside-down. The auto lender wasn’t willing to help, so I did a voluntary repossession. Nissan came after me for the balance remaining after auction but eventually wrote it off as a bad debt (this shows on my credit report). The debt has been sold twice to collection companies that call me on my cellphone and at work but don’t leave messages. I can see they’re checking my credit but they haven’t reported the debt on my credit report. Is this legal? I feel if Nissan wrote the debt off (and I am suffering from that via credit reporting), there should no longer be debt to collect.

Answer: When a lender charges off a bad debt, the debt itself doesn’t disappear. The lender is simply declaring that it doesn’t think it will be able to collect. The debt can be sold to collection agencies, which can post the collection account on your credit reports.

The charge-off is what typically does the most damage to your credit scores, although the collection accounts increase the toll.

There are limits to how long creditors can pursue you in court over debts. The limits vary according to each state’s statute of limitations. There is also a limit on how long bad debts can show up on your credit reports (typically seven years and 180 days from when the account first went delinquent).

But debts only disappear when you pay them or have them legally erased in U.S. Bankruptcy Court.

One of the things you should learn from this experience is not to trust a lender to tell you how much you can afford to borrow. The other is that you should always arrange financing in advance before you venture onto a car dealership lot. If the dealership can beat the deal you get from your bank or credit union, great. Otherwise, you’ve got financing you know you can afford.

How long bad debt can haunt you

Dear Liz: I co-signed a lease agreement for a friend in 2006. The friend flaked on the lease a few months later, so this debt is on my credit report. Everything I’ve read about credit reporting says it should fall off my credit report in seven years. But every few months the collection agency updates my credit report because they are adding interest onto the collection amount, which then updates the date of last activity as well. Does this restart the clock on how long the debt can be reported? Or is it still considered from when the account first was delinquent? I had contact with them a few years ago, trying to negotiate a settlement to clear my credit report, but we never agreed upon an amount and I never acknowledged that this was my debt. I’ve been trying to buy my first home for two years, and this has been the one thing holding me back, causing a lot of heartache, so I’m trying to be as informed as I can about it.

Answer: The clock on reporting most negative marks begins when the account first goes delinquent and isn’t reset when a creditor or collection agency updates or sells the debt. If the collection agency continues to report the debt after seven years and 180 days passes, you should be able to dispute the entry with the credit bureaus and get it removed from your credit reports.

You also may need to be concerned about your state’s statute of limitations for this debt. This statute affects how long you can be sued over a debt, which can vary from three to 15 years. In some states, the statute can be extended if you make a payment on the debt or even acknowledge it as your own.

If you’re at risk of being sued, you may want an attorney’s advice about how to proceed and whether you should try to settle this account. You can get a referral from the National Assn. of Consumer Advocates at http://www.naca.net. Even if you aren’t at risk of a lawsuit, it could pay to get this debt resolved. As you’ve learned, mortgage lenders typically aren’t willing to lend money to people with open collection accounts on their reports.