Great Lies Series: Credit rating

Perhaps the single most common lie in the credit and debt business is the line. “If you don’t pay this bill, your credit will be ruined.” This lie comes in many forms. “You’ll never borrow again” is one. “If you don’t clean this up, you won’ be able to borrow from anyone but a loan shark,” is another I have heard from people.

These threats are often made by debt collectors, and they are totally inaccurate. They were probably never true, but under today’s credit rules, they mean almost nothing. Yes, the debt will be reported as uncollected (it has probably already has been reported when the threat is made) and yes, your credit score may be affected, but this is unlikely to prevent you from borrowing, especially for secured assets like cars and houses.

Maybe (and that is only a maybe) you will have to pay a higher interest rate, but in all likelihood you will be able to borrow.

I saw a financial advisor on TV the other day saying something equally stupid in answer to a question. Soemone wrote in and said they were overwhelmed by debt, which they had no hope of paying, and asked if they should file bankruptcy. The TV advisor said “OH, NO, that will destroy your credit.”

The truth is that people who are overwhelmed by debt have already been reported again and again to the credit reporting agnecies, and their credit is already as bad as it is ever going to be. In fact, because bankrupcty usually clears up a lot of the debt, YOUR CREDIT RATING MAY ACTUALLY GO UP AFTER YOUR BANKRUPTCY IS FINAL.

I know someone who works at a subprime lender who was involved more than once in arranging mortgage loans to people who had filed bankrupcty. As soon as the bankruptcy was final, they closed on the loan. One person bought a house one day after their bankrupcy was finalized.

Click here for more information on your credit rating.

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