When is good credit not so good?

Riddle me this: When is good credit not so good? Answer: When the credit card holder keeps himself poor and enslaved to his enormous, high interest rate credit card debt by having to make ungodly minimum credit card payments just to maintain a good credit score.

I consult with so many debtors who owe more than $50,000.00 in credit card debt, and who are paying anywhere from $1,000.00 to $1,500.00 per month (or more) in minimum credit card payments for years and years, while barely making a dent in reducing their overall credit card debt because all of their payments are gobbled up to pay the interest on the debt. Yet, despite the crushing burden of their credit card debt, their first concern generally has to do with saving their credit worthiness. It shouldn’t be.

The first thing to keep in mind is that it is easy to reestablish one’s credit. Some credit card companies are eager to extend new credit to debtors who have just emerged from bankruptcy with a discharge because they can’t refile another Chapter 7 bankruptcy for 8 years.
There are other ways to reestablish one’s credit. One easy way to reestablish credit is to get a “secured” credit card. With a secured credit card, the debtor deposits a sum of money with the credit card company – say $500 to $1,000, or more – and then the credit card company opens a credit card account with a “credit” line equal to the amount of the deposit. There is no risk to the credit card issuer, because the card holder is borrowing against his own money; however, a secured card allows the cardholder to show the credit card company that he can manage his account responsibly, while having access to credit. In time, if the secured credit card holder demonstrates to the satisfaction of the credit card company that he (the borrower) can responsibly manage his credit card account (i.e., by paying his credit card statements on time), the credit card company will refund the deposit, and the account will become a true, unsecured line of credit. At that point, the debtor has reestablished his credit worthiness.
Also, people with mortgages and car payments already have existing credit. By timely making their mortgage and car payments, these debtors both maintain and reestablish their good credit.
Buying a new (or used) car on credit is another good way to reestablish one’s credit worthiness. Auto finance companies tend to be very willing to lend money to debtors with adequate income after they have obtained a discharge if there is no prior history of auto repossession.
On the flip side, however, there is a typical debtor. The typical debtor is 35 or older, and has virtually no retirement savings. The reason the typical debtor has no retirement savings is because all of his disposable income is going to make his high minimum credit card payments. Such a debtor must take bold and decisive action to change his financial future, if he wants to avoid retiring in poverty, with only social security to support him. The situation is even more dire for those debtors in their 40′s and 50′s because it takes 20 to 30 years (or more) to really amass significant wealth; people in their 40′s and 50′s already have lost many critical years of wealth accumulation.
Often, the best course of action for people with significant credit card debt is to file for Chapter 7 in order to a) wipe out all of their credit card debt, and b) start over financially. One can be in and out of Chapter 7, with a discharge, in about 6 months or less. Most people keep all of their assets. Imagine. No more law suits; no more harassing collection calls. No more debt. Financial Freedom!
There is very little downside to filing for Chapter 7 if, at the end of the day, the debtor a) discharges all of his credit card and other unsecured debt, and b) can start saving for retirement using some or all of his disposable income that was being used for unproductive credit card payments. Everyone needs a fresh start in life; Chapter 7 can be that fresh start.
For those people who don’t qualify for Chapter 7, there are other bankruptcy options. However, the important first step is to stop the financial bleeding; sometimes, filing bankruptcy is the first step to accumulating wealth for one’s senior years. They will be here before you know it.

One Response to When is good credit not so good?

  • There are certainly a lot of details like that to take into consideration. That is a great point to bring up. I offer the thoughts above as general inspiration but clearly there are questions like the one you bring up where the most important thing will be working in honest good faith. I don?t know if best practices have emerged around things like that, but I am sure that your job is clearly identified as a fair game. Both boys and girls feel the impact of just a moment?s pleasure, for the rest of their lives.

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