Recently I was asked by a consumer, whose credit scores were well over a 750 with NO late payments, if he should settle his credit card debt for less than the full balance? My first question to him was, "why do you ask?" If he would have blindly settled these accounts he would have ruined his credit.
About a year ago I spoke with woman I was introduced to through a banker. She had visited with him about six months prior and was preparing to buy a home. She had excellent credit, 785 scores, and a very good income. Right before she went back to the banker, to fill out all the applications, she had been given advice by a family physician. He told her she needed to close all her credit card accounts since they would hinder her ability to get a mortgage. The bank, she was told, would only give her a mortgage based on her income and they would include her existing limits on credit cards as debt she owed. She immediately went out and closed all her credit cards. Her score went down over 100 points and she was denied the loan.
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Last week I went to see a new Dentist and somehow we got into the subject of Real Estate and he started describing his current predicament. He is underwater on an interest only loan he took out in the height of the market. The loan is adjusting and his mortgage payment will be going up dramatically. His income has dropped and his balances on credit card debt are extremely close to his limits. He asked his bank to modify his loan and they refused. He tried to refinance out of it but he doesn't have enough income, on paper, to qualify for the loan and his score has dropped because his balances are so close to the limits. "Why won't they modify my loan? I have always paid on time?" he asked.
Situations like these appear every day in this economy The answer to each one is different, of course. Every situation is different, every consumer is different, and every credit report is different. Each case needs to be looked at with the full facts of each consumers income, future plans, and current problems.
The first consumer we will call "A." Consumer A, after learning more about him and asking why he was thinking of settling, discussed that he heard it is a good idea from friends and some commercials on the radio. I asked him if he is willing to ruin his credit for the $50,000 he might save? His answer was "I didn't know it would hurt my credit." Are you ready to pay taxes on the savings? Will you be buying a home or refinancing a mortgage loan in the next few years? By the time we finished discussing this he was not going to settle his accounts. He is earning well over $300,000 a year so saving $50,000 was not worth ruining his credit. He was referred to me by a banker who was trying to help him refinance a loan within the year, so why would he want to ruin his credit?
The second consumer we will call "B." Consumer B should have never listened to her Physician when it came to credit score advice. Would you ask a mechanic about Brain Surgery? This is a common mistake and unfortunately it really ruined B's chances for getting a mortgage. She has to wait 2 more years to build open active credit after closing all her accounts. She needed this seasoned credit to get the mortgage she wanted. The thing about aged credit is you must earn it over time. Once you close accounts not only are you dropping your scores substantially but you are also taking away your active aged credit. The Physician was advising her based on old outdated rules that no longer apply. If only she would have asked someone with a credit background before she acted on this poor advice things could have been different.
Consumer "C" is my Dentist. His situation was the most complicated but my first question was, "Why would your bank want to take less money when you have been paying them the full mortgage payment on time continuously?" There is no real motivation for them to work with him on the loan modification. The other facts I needed to know were; What income are you really earning? What is your property worth in this market? How much credit card debt do you have in total? Have you looked into a Short Sale? Do you have late payments on your credit report? Do you own any other property? Are you the only one responsible for your current mortgage? Have you spoken to a bankruptcy attorney? Will a relative co-sign on a refinance for you?
The answers to these questions are imperative in deciding the right plan or choice. If C's credit is damaged and his credit card debt is very high he may want to consider bankruptcy and a short sale. If he does a short sale his credit will be updated as a settled account and his score will drop dramatically. With this knowledge it may make more sense to include all of his other debt in bankruptcy instead of settling. Why pay his credit card debt when his credit will be a mess anyway? He may be best served to include all his debt in a bankruptcy and start fresh a few years after the bankruptcy. His credit can be worked on 2 years after the BK is finished through credit restoration. If he chose settling his debt he would still have to pay taxes on his savings. If he owns another property this BK choice would be out, so getting all the facts is a must.
I hope this gives some insight into how important it is to know the facts before making decisions. Asking the right specialist can make the difference between significant dollars and a better quality of life.
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