After job loss leads to debt, rebuild your credit score
Focus on adding positive new entries in your report
Tanisha Warner is the communications manager for Money Management International, where she manages educational content designed to teach consumers about personal finance topics. She writes "Credit Care," a weekly reader Q&A about debt issues, for CreditCards.com.
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Dear Credit Care,
have about $10,000 of 2-year-old credit card debt from loss of job and my
credit score is now dismal. My creditor has turned the debt over to a
collection agency and offered to settle the debt for about 50 percent of the
amount owed. Will this settlement help my credit score? How will it reflect on
cleaning and boosting my score back up? -- Brandon
the damage to your credit score was done when you were unable to make payments
on your credit card debt as agreed. Making payment in full or settling the debt
at this point will not substantially improve your credit score. The reason your
credit score will not improve by paying the accounts is because your score is
calculated based on the information included in your credit reports and is
designed to assess credit risk. The negative information regarding your credit
card accounts that were not paid and turned over to collections is currently
reported on your credit report and will continue to be reported for seven years
from the first date of delinquency (typically 180 days after last payment was
made). It may seem unfair, but when determining credit risk, which is what your
credit score reflects, past behavior is what is evaluated.
it will not make a significant difference in your credit score, I recommend
that you make the decision about settling your credit card debt based on what
is best for your current financial situation rather than how it will affect
your credit score. Future lenders are going to want to see that you paid what
you owed on these accounts. Settling the accounts is an acceptable, albeit not
the preferred, resolution for payment.
you have the money and decide to settle the accounts, be sure you have the
settlement agreement in writing before you make payment. Also, if you settle
for $5,000 and owe $10,000, the forgiven debt of $5,000 is considered income by
the Internal Revenue Service, which means you may have to pay income taxes on the
forgiven amount. Keep copies of the settlement agreement so you can prove that
the accounts were paid just in case you are contacted in the future regarding
your credit score will come with time and positive information added to your
credit reports. More weight is given to the most recent activity on your credit
reports, so the more time that passes, the less of an impact the negative
credit card accounts will have on your credit score. To increase your score, you
will need to have regular positive information being reported on your credit reports.
If you do not have any positive current accounts, you will need to establish
some. Obtaining new credit with a low credit score can be tough, but you do
You may consider a secured credit card to re-establish credit after a financial
crisis such as an interruption of income due to a job loss. Be sure the card
issuer reports account activity to the three major credit bureaus. You might
also consider a card that automatically converts to a nonsecured card after a
defined period of monthly on-time payments.
is important to remember that your credit history will often reflect what is
going on in your life. Your credit was negatively affected when you lost your
job. To help minimize the financial impact of future life events, begin an
emergency savings account of at least six months of living expenses. Having a
cushion to help you through unexpected expenses and income losses may help you
keep your credit score intact next time.
your credit with care!
See related: Report forgiven debt to the IRS on a form 1099-C
Tanisha Warner is the communications manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. She manages educational content designed to teach consumers about personal finance topics. You can find more money management advice on Blogging for Change and MMI's Facebook page.
Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week.
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Published: September 17, 2012