THE DEBT ADVISER: Ignored debt grows and damages many parts of your life

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By Steve Bucci, bankrate.com | Saturday, July 05, 2008 |

Q: I made a stupid mistake. I refused to pay my gas credit card because my $95 gasoline bill grew to $305, after $210 in late fees. The last payment was in January 2005.

The gas credit card was charged off in June 2005 and sold to a collection agency in May 2007. The collection agency raised the amount due to $408 in May of this year.

In six months, the debt will be past the statute of limitations in California, which is four years.

I was trying to refinance my home mortgage and I found out about the negative items that I’ve been ignoring. I’m not sure what to do.

I have no other debt and I have a lot of assets. I can easily pay off the debt, but it might not be worth paying it off since the damage has been done to my credit.

Should I contact the original creditor? Hire a credit-repair agency? I can pay off my debt, but I’m not sure I can fix my credit record.

A: You owe $408 for $95 worth of gas? I hope you have a lot of stock in that oil company! Seriously, you started your letter correctly by acknowledging you made a mistake. Then, you made things worse by ignoring the situation.

Before you make another mistake (or two or three), let me address some of the key points you raised.

First, you have six months until your state statute of limitations applies. You should take little comfort from this.

The item will be reported for seven years from the delinquency that led to the charge-off. I figure that to be January 2012. The statute may keep a collector from getting a judgment and subsequent garnisheeing for the debt, but only if you show up in court (at your expense) to show that the debt has expired.

You still owe the debt, and collectors can still call. The debt also will remain a negative on your credit report.

Second, your mortgage-refinance issue is just the tip of the iceberg. Many people don’t know that a negative credit history will also hurt you if you have to look for another job, are up for a promotion at work, are at renewal on your personal insurance or are trying to rent an apartment.

A poor credit history also may trigger a universal default (with 30-plus percent interest rates) on your other unsecured credit accounts.

Third, if you can easily pay off the debt, do it. You’ll avoid all the difficulties I just mentioned and avoid an unpaid charge-off on your credit report, which is a very serious negative item in your credit-score calculation.

Pay the bill and your credit report will show a paid charge-off. This says you were late but stepped up and made good on your promise to pay.

Fourth, stop trying to get around this debt. Pay it and move on. Pay the original creditor, pay the collector — however you do it, just pay it! Until you do, you can’t begin to fix your credit record.

Forget the credit-repair company. You will begin rebuilding your credit record by paying your bills on time and in the amount to which you agreed. It doesn’t get much simpler.

Finally, you are seeking to refinance your mortgage during a credit crunch.

It may be better to ride out this current tight credit cycle and refinance once lenders again have excess money to lend and your credit has recovered to get you a great rate.

Steve Bucci is president of Money Management International Financial Education Foundation.