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How to improve credit while wages are garnished

By  |  Published: March 8, 2017

Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
I just started getting garnished for some old hospital bills (I owe about $3,500) and I know it is obviously way past me setting up a payment plan, but I am just wondering what are some ways I can improve my credit now, during or after this is over? Thanks in advance! – Sarah

Answer

Dear Sarah,
Yes, I’m afraid the window of opportunity to arrange a voluntary repayment plan with the creditor has closed. Because you were sued for the debt and lost the case, you’re left with mandatory installment payments that the creditor has been permitted to claim from your paychecks. It’s an expensive, unpleasant and credit-damaging way to pay a bill over time.

If there is a positive side, the wage garnishment will force you to deal with this debt. After it’s paid in full, your credit report will reflect that fact and your credit rating will improve. You will have to wait until the balance is zeroed out first, though, since the creditor will not send information about your incremental payments and steadily declining balance to the credit reporting agencies.

You can speed up the credit recovery process, however. It is your right to pay more than the wage garnishment amount, and I strongly suggest that you do, if you can afford it.

For example, let’s say the garnishment amount is $200 per month. With an estimated 10 percent post-judgment interest rate, it would take you just over a year and a half to be in the clear. That’s a long time to wait before you can enjoy your entire paycheck again and overcome this credit rating problem. But if you can augment the garnished sum so it totals $500, it will take just eight months to be free of this debt. Use our debt payoff calculator to construct a personalized payoff plan.

Another option is to pay off the debt with a lump sum. If you don’t have the funds available, you may want to ask a friend or family member and then you can prepay that person. Or sell something of value, such as a car.

However you do it, after the debt has been deleted, all that will remain on your credit report is evidence that the debt went bad. It will show up in the trade-line section of the credit reports until a total of seven years has passed, beginning when the collector first purchased the account. The judgment will show up in the public records section of the report for seven years from the filing date. Pull your credit reports from annualcreditreport.com to see what this all looks like. If you’re worried that the wage garnishment notice will be on your reports, don’t be. Such a collection method isn’t listed.

In the meantime, you can give your credit rating a jolt by properly managing other accounts that are appearing on your credit report. If you have a credit card, use it occasionally and pay it off in full and on time. Have a car or other loan? Pay by the due date. Keep your debt-to-credit utilization ratio super low, too, which means don’t charge purchases that add up to more than 30 percent of your credit line each month.

In the event you have no other active accounts, wait until this debt is deleted and then apply for a credit card that is within your credit rating reach. Use the CardMatch tool here to identify the right cards for you. That will help you avoid being unnecessarily rejected, which would lower your scores. When you have an account, treat it responsibly to add positive data to your reports.

Lastly, a word about future bills: Never let them go this far again. As uncomfortable as it is to pick up the phone and communicate with a creditor, it’s far more painful to be sued and then have your wages garnished.

See related: Video: The road to wage garnishment, What happens after a debt is charged off

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Updated: 08-20-2017

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