Credit Hell

Living large on your card? You could end up with a credit rating like a Third World nation’s. Here’s how to end your tale of owe.
Details magazine, November 2002

I finally realized how bad my credit was one Sunday morning when I picked up the phone to hear a recorded voice saying, “This is an important message from your credit-card company.” I’d gotten calls like that on weekday afternoons, but it was only when I started getting them on weekends that it dawned on me I might be screening my calls for years to come.

Take it from me: bad credit can wilt your manhood faster than a beefcake photo of Alan Greenspan. It could make it impossible for you to get a lease, a mortgage, or an auto loan. And everything’s tallied and preserved in a personal credit report that more people than ever are looking at. Your health-insurance company might be setting your premiums based in part on your credit score, and employers may weigh an applicant’s credit during the hiring process. It can hit even closer to home: “For people who are thinking of getting engaged, it’s the AIDS test and then the exchanging of credit reports,” says Dayana Yochim of the personal-finance Web site Motley Fool. “Your credit report is either your badge of honor or a measure of your shame.”

For most of us, bad credit creeps silently in on a current of late payments, loan defaults, and maxed-out cards awash in Christmas gifts, CDs, and plane tickets. “I had a profound misunderstanding of what a credit card was,” says one chagrined borrower in his thirties who charged computers and trips to India. “I don’t want to think about how much money I’ve spent between interest and late fees,” he groans.

As far as I’m concerned, he’s an amateur. After a decade of profligate irresponsibility that featured, marriage, divorce, a little globe-trotting, and some department-store sprees, my last card was cancelled even though I’d been making my payments on time. (I’d been late on some other accounts.) Now I survive on my debit card and the good graces of American Express—paid in full every month.

Bad credit can also arrive like a slap in the face. After letting his wife handle all the banking and bills, another guy I know, now divorced, found himself holding the bag for six figures’ worth of bank loans and credit-card debt. “It wasn’t even me borrowing,” he says. But in the eyes of the law, it might as well have been. “There are the people who write down every penny they spend and are masters of Quicken,” says Yochim. “And then there’s the rest of us.”

To find out just how tarnished your honor has become, pay the $30 or so to get your report from all three big credit-reporting agencies, in case one contains a mistake the others don’t have (Equifax, Experian, TransUnion). Then find out your FICO score, a kind GPA of creditworthiness that’s used to make lending decisions.

Scores range from 300 to 850, with 720 about average and anything under 600 starting to smell funky. The obvious boners: late payments, tax liens, bankruptcies, foreclosures, and even things like doctors’ bills that have gone to collection agencies. Your score can take a hit if you co-sign someone else’s lease or loan. How long you’ve been at a job or an address, whether you rent or own, have been sued or arrested—it all goes into determining how likely it is that you’ll pay back your debt. And credit agencies have a longer memory than you do; a single delinquent payment can stay on your record for seven years. Think you’re in too deep? What you do now counts most. “Recent late payments, even if they’re very small, could count against you more than a 90-day delinquency five years ago,” says Gerri Detweiler, author of the how-to The Ultimate Credit Handbook.

If you find yourself buried under a pile of cancelled credit cards and THIS IS AN ATTEMPT TO COLLECT A DEBT letters, don’t panic—but do grab a shovel and start digging yourself out.

First, make sure the information in your report is accurate. Up to 75 percent of credit records contain errors, says Yochim, and at least 85,000 people in the United States were victims of identity theft last year, according to the Federal Trade Commission. Errors range from misspelled names to fraudulent accounts a stranger has opened after getting hold of your social-security number. If you do find a mistake, write to the agency (don’t call), and send the letter by return receipt, so you know it got there.

Next, negotiate with lenders to get your interest rates and monthly payments as low as possible. Insist they match the low-interest balance-transfer offers you’re getting in the mail. If they don’t, apply for one of those offers. (One trick: Don’t automatically close your old accounts. Lenders look at the ratio of your debt to the credit you have available. Closing debt-free accounts—even if you’re not using them—means you’re carrying the same amount of debt on a lower total limit. Not good.)

If you’re broke and have to miss a payment, Detweiler recommends skipping one that won’t show up on your credit report until it goes to collection, like your cable bill. If you’re having trouble paying both rent and bills, ask for help—but be careful. “When you have really bad credit,” Yochim warns, “there’s a whole host of people that come from the underbelly of the lending industry to ‘help’ you,.” She recommends a service like Myvesta or Consumer Credit Counseling Services.

Even though the party’s over, you don’t have to take a vow of poverty. One day soon, you’ll be able to open your bills without breaking a sweat. “The only way to fix your credit,” says Yochim firmly, “is to prove you’re mature enough to handle credit.”

Calculating the national deficit
  • The average credit-card balance per household is $8,400.
  • At the end of the first quarter of 2002, Americans owed about $660 billion in credit-card debt.
  • There are about 500 million bank credit cards (VISA, MasterCard, Discover, and American Express) in circulation in the United States.
  • In 1999 there were more than 1.3 million personal bankruptcies declared.
  • There are approximately 120 million platinum cards in the United States.
  • The average American carries eight pieces of plastic (debit, credit, and retail cards).
  • More than 40 percent of U.S. families spend more than they earn.
  • Americans paid out approximately $65 billion in interest last year.
  • Only 40 percent of active accounts are paid off immediately.
  • In 2001, Americans charged $1.3 trillion to credit cards.