Dear Debt Adviser,
I am just wondering about what my options are for handling my debt. I don’t have a large amount of it. However, it is all charged off and being handled by collection agencies. The problem began when I was about 19. It’s been 4 years, and I am at a loss. I don’t know what there is out there — credit counseling, debt management plans, debt settlement? I keep reading that these are all going to make my credit worse, as if it could be! Any help would be great!
I can tell from your e-mail address (.edu) and your age that you are a student at a university. Clearly you are not alone. More students and recent grads are writing to me with financial problems like yours. They’re often compounded by crushing student loan debt.
Getting a handle on your debts before you graduate is particularly important for you and others in school and in debt. The reason is that your credit report — your horrible credit report — will be seen and will scare the pants off the people who you will soon be searching for a job, an apartment, car and renter’s insurance, and more.
The first thing I want you to do is get free copies of your credit reports from the three major credit bureaus — Equifax, Experian and TransUnion. Go to AnnualCreditReport.com to get free, no-obligation copies. Once you get your reports, review them and make sure all the information is correct. If you find any errors, you can file a dispute to have them removed with the bureau that reported them. You can file a dispute online on the bureaus’ Web site or in writing.
Next, using the information included in your credit reports, you will need to determine exactly how much you owe. Although you say you don’t have a large amount of debt, you may be surprised to learn that the amount has grown quite a bit in four years from penalties, added interest charges and fees. Then, you need to decide how you plan to pay what you owe.
If you have enough money to pay an account in full, I’d start with that account. Write to the collection agency people — you’ll find contact information on your credit report for each of your collection accounts — and tell them you are prepared to pay what you owe. Request a payoff amount and payoff instructions. Your payment should be sent certified mail, return receipt requested. Keep copies of everything including your canceled check — you can print a copy online from most banks’ Web sites — just in case the account is not properly marked as paid and is sold to yet another collector.
For those accounts that you cannot afford to pay in full, you have several choices. If you have income and can afford monthly payments, your best option is to use a nonprofit credit counseling agency that is a member of either the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. They are inexpensive, can negotiate lower payments better than you and can help to keep the lines of communication open.
If you can’t manage monthly payments but have access to a lump sum from mom and dad or another source, I suggest using an attorney to negotiate a settlement. I don’t recommend that you use a debt settlement company.
If you can’t make payments and can’t pay a lump sum, I suggest you speak to an attorney about other legal options such as whether your creditors can prove the debt is yours or whether the statute of limitations has expired. Have an eye toward the long-term consequences of each alternative for a newly minted job seeker.
You are correct that your credit can’t get much worse, no matter what your choice is moving forward. Once you have addressed your debts, your real challenge is to improve your credit history as quickly and as much as possible before you graduate. For more information, I suggest you go to myFICO.com. Adding positive information now will help to improve your credit, and you will look much more attractive to possible lenders and employers.