Young debtor, learn the basics before it's too late
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,
I have $5,000 worth of debt in collections. I
want to take care of this. My grandma told me to go to an attorney, a friend
told me to do a debt relief program. I am 25 years old and don't make a lot of
money. What should I do to get out of this and have it not affect my credit anymore
in a bad way? -- Kimberly
Paying off a debt in collections is a terrific
goal. Getting out of debt and staying out of debt is an even better one.
Even though you don't make a
lot of money, that $5,000 debt is a problem you can overcome -- if you learn
the basics of handling money and debt. Because you're young, this is an ideal time to learn from your mistake and establish good, basic money habits that will serve you for a lifetime.
that in mind, I suggest that you contact a consumer credit counseling agency
for a free, comprehensive budget analysis. You can reach an accredited, nonprofit
credit counseling agency by visiting the Association
of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.
(My employer, Money Management International, is accredited by
Your credit counselor will help you develop a
budget so you know exactly how much you can afford to pay each month on your
debt. The knowledge of where you spend your money each month is essential to
successfully managing your finances. For example, many people are surprised to
learn how much they spend each month on eating out, their morning coffee or
entertainment expenses. Once you know how you are spending, you may be able to
cut back on nonessential expenses enough to begin paying your debt.
Or, you may have only enough income to cover your
basic, essential expenses such as housing, utilities, transportation, insurance
and food. If that is the case, you might want to explore opportunities to
increase your income through a higher-paying job or maybe a second job. You
might even consider ways to lower your housing costs (typically the largest
monthly expense) such as living with a roommate or moving back home with your
parents until you can pay off your debt.
Now for your question about your credit. The fact
that your debt is in collections means that most of the damage to your credit
from these accounts has already occurred. Once the debt has been placed in collections, it is typically more than 180 days past due. Paying even 30 days late
has the potential to drop your credit score more than 100 points. However,
adding positive information to your credit report will eventually help your
credit score to rise. Paying regularly on your accounts instead of leaving them
unpaid, will also, with time, help improve your credit.
To add positive information to your credit
report, be sure you are making payments on all your other open accounts on time
and as agreed. If you have any accounts that are being reported late, but have
not yet gone to collections, make the past due payments as quickly as possible
to catch up your payments so your account will be reported as paid as agreed
rather than 30-day, 60-day, etc., late.
Once you are back on your feet financially and
have a plan to pay down your debt, be sure you include in your budget saving at
least a portion of your monthly income in an emergency savings account. Your
savings will allow you to pay for unexpected expenses instead of relying on
See related: Interactive: The life cycle of a delinquent credit card account
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: May 14, 2012