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How to Recover from 6-Month Payment Hiatus

May 30, 2005 | | Comments Comments Off
Q: I am 60 and until last year had an excellent credit history with high FICO credit scores. About that time, I succumbed to a period of depression and stopped paying all bills for which I had not set up automatic payment options. My mortgage, car payment and utilities got paid, but I didn’t pay my three credit cards. Eventually, after six months or so, I revived sufficiently to be embarrassed and terrified. The accounts were in collections by then but I paid them off in full. Now, I have no unsecured debt and am not going to be having any for a long time since my credit cards were cancelled. I’m sure I have a terrible FICO score, and don’t dispute that I deserve it. But I’m wondering if a short period of flakiness might be easier to recover from than a long history of financial mismanagement? Doesn’t my long history of good credit count for something? 

A: The FICO credit scoring formula doesn’t really care why you flaked out; it only cares that you did.

The formula weighs recent behavior more heavily than past behavior, which is both bad and good for you. The bad news is that your scores were almost certainly devastated by the delinquencies, charge-offs and collection accounts you accrued, despite your long history of on-time payments. But if you get your act together and start handling credit responsibly again, you can start to rehabilitate your credit.

Continuing to pay your installment loans on time will help, but you also should think about getting a secured credit card, which gives you a credit line equal to the amount of cash you deposit at the issuing bank. Choose one that converts to a regular card with 12 or 18 months of on-time payments, and use it lightly but regularly. Try not to charge more than 30% of your limit, and pay the balance in full every month. (Perhaps you’ll want to set up automatic payments, as you have with your other bills.)

It may take a few years to recover from your six-month lapse, but it can be done.

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