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Debt is so simple to accumulate. That's how things operate in the world. Few people can afford to pay cash for large items like homes or cars. It's far too simple to take out your credit card and charge it when you need any of those things fixed. Although it's simple to accumulate debt, it's more difficult to escape it.
It's also not so easy to make sure you don't have any delinquencies that can ruin your finances. When you have delinquent bills, debt collectors come calling. The debt is marked on your credit report as being late, how many times it's been late and the amount you're late on. After the delinquency is reported, it impacts your credit score by lowering your points.
While there can be a lot of different delinquent debts, the biggest debt most Americans have is credit card debt. Because they're so easy to get, most people have more than one card with balances that they can't pay and so it goes into collections.
Credit Card Debt
People are of two minds about credit card debt. Some people think you shouldn't have any at all while others think it's perfectly okay to have multiple cards. The truth is that it's okay to have credit card debt as long as it's not delinquent. However, due to situations that are often beyond your control, this can happen.
If you experience a job layoff or you go through a divorce or other traumatic life experience, you might have the means to pay your debt. This doesn't mean that you're ruined and you shouldn't bother trying. This type of delinquent debt doesn't have to ruin your finances. But you can't be passive about it and think there's nothing you can do.
This is one of the biggest reasons that people get into trouble financially. They know there's a problem but they don't address it. The moment that you realize you're in trouble with debt, do something. You have to fight back against debt. If you're running into trouble and you have several cards, transfer the balance to the cards with the lowest interest rates.
If you have an annual fee or any kind of fee based card, you want to get rid of that card as soon as possible. There are too many other cards that won't charge you an annual fee for you to have to put up with that kind of charge. The reason that you want to do away with fee based cards is because if you have a card that charges you a $75 annual fee, that fee doesn't stop just because you become delinquent on your monthly payments.
So if you can, you want to switch any balances on that card to another card. That opens up that annual fee so that you can use that to pay toward the other cards. If you're not sure which card is the lowest, you can check with a credit card index that will show you the rates that various cards have.
Next, you want to contact any of the delinquent accounts you have. Credit card companies do have hardship problems where they will be more lenient with you than if you simply overspent and just got behind in paying the bill. While most of these companies won't simply wave away your debt, they are willing to reduce your interest rate and stop the late fees while you get your financial life back in order.
Sometimes what they'll do is cut your payment down or stop the payments for a brief period of time. Don't use a debt settlement company to help you get out of credit card debt. Using one of these companies can lower your credit score, plus, you're paying them to help you get out of this debt. Instead, do it yourself. You'll save money and it won't impact your credit any further.
There are some people who will tell you that if you have multiple credit cards to pay them off and then close that account. But closing a credit card account, whether it's delinquent or up to date with the payments, can actually hurt your credit more.
The reason it does this is because it shows up on your credit report as a closed account. If there's a balance, then it looks like you debt ratio compared to your open account ratio is higher than what it actually is. If your credit is good, look for cards that you can get that offer very low financing percentages and will offer you some perks if you transfer balances.
Overdraft Fees
Bank fees are another area that can throw you into a delinquency pretty fast. Unlike days ago when banks were glad to have your business and considered it part of doing business to serve you, now you'll be charged for a lot of the business you do with your bank.
You can be charged maintenance fees simply for having a checking or savings account with that bank. You can be charged if there's no activity on that account. A lot of banks are charging customers usage fees to speak with a bank teller and they're also charging monthly fees if you go into the branch and have a teller transact your business versus you doing it yourself through online banking.
Some banks charge you for getting a monthly bank statement or for pulling out money from your checking or saving account if you go over their limited withdrawal guidelines. But that's not the only way that banking can throw your finances into delinquency and this can be a high cost delinquency too.
What many banks are doing are hitting customers with extremely high overdraft fees even if the actual cost of the purchase was a few dollars. You can incur fees as high as $35 per overdraft. So say you spent $350 when you had $349 in your account. Your bank can charge you the $35 fee. Then on top of that, they can add more charges the longer your account is in delinquency.
And something that a lot of people who do have overdraft protection don't know about banking is that if three items come in at the same time for costs of $30, $30 and $10, the bank will pay the two $30 transactions first so that you get that delinquent fee. Then they'll pay the second item so that you get another delinquent fee rather than paying two of the costs so that you only end up with one fee.
The reason they do this is because banking is a business and they're in it to make money, not to save you money. If your bank seems to be milking you for every available charge that they can, it's time to look elsewhere.
Another way that banks can contribute to creating delinquent debt for you is by charging you high fees to use their debit card. Some banks charge a monthly fee just for you to have their card and use it.
You can end up with overdraft fees by using the ATM. It's easy to not realize that the ATM you used charged a $2.50 withdrawal fee instead of the $1.75 you were used to paying. Being off by that small .75 cent difference can overcharge your account and the bank will take their big overdraft fee.
Something else the bank does was brought to our attention by the Consumer Financial Protection Bureau. In this study, it was shown that when someone overdraws a debit card by making a purchase, the bank fees are often substantially higher than the purchase.
Banks are routinely pocketing just under $1,000 in debit card overdraft fees per overdrawn account each year. That's a lot of money that banks are taking from you when you add it all up.
You can fight back by first not doing business at a bank that charges you a debit card fee just so that you can have their card. You're doing them a service by banking with them in the first place with your money. Also, if you've been with your bank for a while and you don't have a history of overdrafts, some banks do offer a one time fee waive for overdrafts. It's worth at least asking if they do this.
Some banks, if you have multiple fees, won't waive them all, but they might be willing to waive half of them. What you have to do is actually go into the branch and speak with the customer service representative. If the representative isn't willing to work with you, go to another branch of your bank and ask for the branch manager right away. They do have the authority to make a concession for you.
Next, look for banks that will give you overdraft loan coverage rather than overdraft fee coverage. With the loan coverage, the bank will pay the amount over what you have in your account and won't charge you a fee. You'll end up paying only the interest charged on the loan, which is a lot less than the standard overdraft fee.
If you're in any kind of delinquency with your bank and you're getting hit with these big fees, you have to do whatever you can to stop that. Bring your account current as soon as you can because the total percentage rate you're getting hit with from your bank can be astronomical. Even if you have to borrow the money from a friend or relative to get current with, it's worth it for the amount of fees you'll save.
Breaking the Delinquent Debt Cycle
If you have delinquent debt and it's not because of a difficult life situation, you can take immediate action to break the cycle. First, you need to get control over you money. If you don't manage your finances, this is one of the fastest ways to accumulate delinquent debt.
You need to know what you owe, who you owe it to, what the interest rate is and what the payoff is. This way, you can start a delinquent debt repayment plan or you can use it to prevent yourself from going into delinquent debt. Secondly, you have to know your weaknesses when it comes to finances and we all have an area where we're weak when it comes to money. For some, it's shiny new toys and for others, it's wanting to live above their means.
Third, if you're in delinquent debt right now, don't make more debt. Stop using your credit cards. Put them away and strive to pay cash until you can bring everything current again. This might mean taking on a second job or cutting out some extras for the time being.
Pull Your Credit Score Up Despite Past Delinquencies
There are some steps that you can take to improve your finances regardless of what they're currently at. Some people have experienced such financial upheaval that they no longer have any credit accounts. The only things on their credit report are delinquencies. If this is something that you've dealt with, you can fix it.
First, get a credit card that's a secured one. With this type of card, you put up the funds first for the card. This is usually $500 for the minimum amount. These cards do have a higher interest rate and most of them also charge an annual fee to use their card. Don't let that discourage you if you're fighting back against delinquent debt. This is just a step in the right direction.
What you want to do is to make sure that you have the money already put back in savings to pay that monthly credit card fee. You want to make just over the minimum payment amount and you want to do it faithfully.
There are some consumers who think they should charge something on the card and then pay it off immediately. But it takes time for new accounts to be reported to the credit bureaus. If you pay it off to soon, this does not help your finances at all.
You need to pay on this card for a bare minimum of six months, but a year is better. Just pull the money from your savings account to pay the bill. This way, future creditors can see that you paid the bill on time every time. A credit card is a revolving loan. That means it can stay open until you close it or the company closes it. You also want to look for ways to get loans that have a closed end. Both types of loan help repair your finances.
One of the best ways to get a closed end loan is to go to your bank and apply for the smallest loan that you can possibly get. These usually start at the $500 mark. Depending on your credit score, you can pay anywhere from $50 to $65 in interest over the course of the loan.
You also want to keep this loan open and make monthly payments on it for at least a year. Just have the $500 plus the interest to pay off this loan already in your savings account. If you've experienced financial hardship such a divorce, explain that to the loan representative and the underwriter will take that into consideration when it comes to approving the loan. Once you pay this loan off, apply for another one that's slightly more and repeat the process you just did.
Delinquent Debt Tips
When you're delinquent on any account, you'll see a minimum payment due. Try to pay over that amount every month. List all your debts and pay the smallest one first. This lets you feel like you're making progress at knocking off those delinquencies.
Know when the delinquency first started and pay attention to your credit report. What some less than honest collection agencies will do is they'll continually change the date on the debt so that it looks like you just went late on the debt. This is an illegal practice that they do because it gives them more time to collect on the debt. Debt collectors are limited by federal guidelines as to when they can bring legal action on a debt.