How badly will my credit be affected by recent illness?

June 19, 2007 12:58 PM

I spent the first several months of this year ill to the point of being unable to work—which, being an independent contractor, meant that I was not billing, which meant that eventually I had no money coming in after a couple of months and ran up a lot of credit card debt as a result—which payments I have not been able to make for the last 2-3 months. How badly will this affect my life, credit-wise?

This is the first time in the last six years in which I have been contracting that this has happened, and under normal circumstances, I have no problems covering all of my bills and still live comfortably. Though I have been late on payments on the occasion, I have never missed payments. I started working again about a month and a half ago but I lost a large chunk of my usual income, having missed work in the beginning of the year which usually covers me for about 2-3 months. I do have work and am not (as yet) terribly concerned about not being able to get more and start earning as much as I had been before my illness, summer is usually slow. I do believe that I will be able to get back up to speed before long however.

In the meantime, I have only been able to cover my living expenses (house which i bought three years ago and a car I bought last year), though I am a bit behind, again dependent on when I get paid out from invoices. I have not as yet been able to make payments on my credit cards and one equity loan (currently, I am about 2-3 months behind on these payments) and have been getting the daily collection calls. A friend of mine who (who works as a financial advisor) dealt with his own debt problems several years ago (he ended up going to a credit consolidator) says that as long as I am able to make the payments on my house and my car, not to worry so much about the other payments; that yes, it will mess up my credit (which has always been good to excellent to this point) but because I was unlikely to need to apply for a loan for anything major (house and car already having been purchased), that this won't be that big a deal.

Am I okay in following his advice? what happens when I can begin making payments on my credit cards again—do I pay through the credit card company or through the creditor? How long does this affect one's credit rating? Has anyone been through a similar situation and have any advice or suggestions for my situation?

posted by violetk to work & money (9 comments total)

uh...the best thing to do is to call the creditors and explain your situation, work out some kind of payment plan...they may forbear or drastically reduce payments for awhile while you get your stuff together....

seriously, i know it sounds crazy to call the people to whom you owe money, but it can only make matters better, and it won't make things worse

and you may be able to mitigate further damage to your credit, which will last for awhile
posted by Salvatorparadise at 1:41 PM on June 19, 2007

PS - your friend is right, generally it is wise to make payments first on secured credit obligations - IE those backed with collateral like house or car, which they can and will take after awhile

they can't take your house or car, for instance, for not paying your credit card because it is unsecured credit...but it's still a good idea to try to work something out with those that you can't pay right now...or at least find a way to pay just a little bit, which they'll sometimes be happy with
posted by Salvatorparadise at 1:45 PM on June 19, 2007

Sorry, that doesn't sound like a fun situation. I hope things work out. Right now it sounds like you need to call your credit card companies (they might be understanding considering the circumstances), and maybe look into doing some consolidation. Maybe a home equity loan to pay off the credit cards?

I did want to point out that this is why a lot of personal finance people recommend that everybody should have an emergency fund. It should be money you put away, somewhere fairly accessible, covering your *total* living expenses for a certain amount of time. I see 3 months living expenses recommended a lot (put it in an online high yield savings account). Since you're a contractor and your work/earnings is uneven, you might be better off working up to even higher amount - 6 months maybe?

So best of luck, and in the future remember that emergency account....
posted by warble at 1:52 PM on June 19, 2007

I'm sorry for your misfortune. From my experience with debt collectors (I was unable to make payments while waiting for my work visa, which took months longer than we'd been led to expect), I would say that your friend is right to say that your house and car (i.e. secured debts) should be your top priority, but that doesn't mean you should just ignore the credit cards. (I don't know about the equity loan - if it was secured you should make it a priority over your credit cards.)

However, your friend is wrong to suggest that messing up your credit rating won't have an effect on you - your existing credit will suffer for it (well, not the secured stuff, but credit card companies use any excuse to up your interest rate).

Call them. Tell them what you've told us. Be honest - it absolutely cannot hurt (the worst they will do is exactly what they would have done had you not called them at all). They will be likely to give you a bit of a hard time about your apparent radio silence so far, and they might raise your interest rate. If you had any kind of special offer, you've now lost it. Your goal now is to mitigate any ongoing damage to your credit rating, your interest rates, and your relationship with your creditors. You want to give them a reason not to turn this over to a debt collection agency, who will call at 8 a.m. on Saturdays and generally be a lot more difficult to deal with than your credit card company. Some companies will let you make a "showing good faith" payment of $25 or so, just to show you're trying, to patch you over a rough time.
posted by joannemerriam at 2:39 PM on June 19, 2007

Call your creditors and explain the situation. Negotiate to see if you can reduce the minimum payments and stop the calls. Ask your bank about a loan to consolidate the credit cards -- if the interest rate is lower.

I do not recommend switching to a home equity loan. You will be transferring unsecured credit to a secured line of credit. This means you are putting your home at risk. Given your recent situation, you would not want to get into this situation again and lose your home.

Once you've managed to get your head above water and you're making the minimum payments, work toward establishing an emergency fund. As a self-employed individual, I have six months of living expenses set aside. You should get an emergency fund set up, then start paying down your debts at a more rapid pace.

If your health will allow it, you may want to pick up a second job or side job right now. Even $8 an hour for an extra 15 hours a week would give you almost $500 a month -- which will help you make a dent in those payments.
posted by acoutu at 2:54 PM on June 19, 2007

Some companies will let you make a "showing good faith" payment of $25 or so, just to show you're trying, to patch you over a rough time.

They do that because it resets the statute of limitations. They're not trying to do you any favors. Be assured, these are usually companies dealing with billions of dollars - every move they make is carefully calculated to maximize total return.

That said, these companies have no interest in losing you as a customer if they think you'll rebound. You should definitely pick up the phone and call them and ask what they can do - there's no harm to it. Just don't get badgered into anything that's not in your best interest.

As far as the calls go, collections agencies are legally bound not to call you if you indicate to them it's not convenient to take calls. Simply answer the phone and when they identify themselves say "it's not convenient for me to discuss these matters by phone, limit yourself to written contact only." If you're getting called by the creditor themselves this doesn't apply but after 90 days they likely will hand you over to an agency.

Which brings something to mind - don't ask them what you can do when they call you. Call the number on your cards/statements and talk to them. If you're already handed over to an agency they're not going to have access to any hardship programs.
posted by phearlez at 3:02 PM on June 19, 2007

Definitely call them and explain - most will have some sort of temporary hardship forebearance program, and might work with you.

Note: You can also put a note or explanation in your credit file with the major bureaus once this is said and done explaining the situation. It won't help your score but might help in some situations.
posted by mazienh at 5:29 PM on June 19, 2007

I'd post this same question over at creditboards.com. It's a message board (kinda like AskMe) for people trying to fix up their credit, so the readers are real experts at what affects credit scores, how collection agencies work, etc.

The statute of limitations for most of this is seven years (I think. So before you let your credit score get beaten up, I'd make sure there's nothing in that time you'll want a loan for.

Personally, either way I'd try to stop things from sliding too far down. There are definitely ways to mitigate the damage. Eg, some credit card companies still consider you an okay person if you've gone 60 days past due but blackball you or something after you hit the 90 day mark. They'll start closing your credit card accounts, which looks worse than just a late mark.

(My personal guess, and I'm not really an expert here, is that if you're between 60 and 90 days late, you are probably still in a zone where your credit will easily recover, but that things will start getting worse soon.)

If you truly will be back on your feet soon, the HELOC actually sounds like a great idea to me, if you can get one. It'd keep your debts from getting sold, reset all your "past due" clocks.... But I'm not sure here. Seriously, go ask the experts.
posted by ruff at 7:11 PM on June 19, 2007 [1 favorite has favorites]

Hmm, I was just thinking more -- if you could get one month off from your mortgage, could you pay the minimum on all your credit cards and reset the past due clocks? Why not ask the bank for one month's forbearance or something like that? That way, your credit shows a whole bunch of modest screw-ups rather than any one major screw-up. I don't have a mortgage, though, so I don't know how flexible banks typically are.
posted by ruff at 8:06 PM on June 19, 2007