Photo: Edwin Datoc

Credit Score Issues

Q: Since completing a Chapter 13 bankruptcy eight years ago, I've raised my credit score from 300 to 689, bought a house and a used car, and saved $10,000. But recently, two collections for forgotten medical bills hit my credit report and dropped my score by more than 80 points. Should I drain my savings to pay off my debt?

A: I generally encourage people to make good on debts when they have enough money to repay them. But once a delinquency has been reported to a collection agency, paying it off won't help your FICO score. The damage has already been done, and the blemish will remain on your credit report for seven years.

At this point, I'd recommend that you negotiate with the debt collector so you can repay a smaller amount and keep more of your savings. Creditors will often accept far less than what is actually due. One important caveat: When you negotiate a lower payment, the IRS usually counts the forgiven amount (what you're not required to pay) as income, which means that you'll owe taxes on that money.

Q: I've got $17,000 in credit card debt, $21,000 in student loans, a car payment and an interest-only, variable-rate home loan that will adjust in two and a half years. I take in about $37,000 annually. How will I ever be able to save for today, for retirement, for my sons' futures? Where do I begin, and how do I prioritize?

A: Your overriding goal must be to stay current on all your monthly debt. Pay at least the minimum amount due on your credit cards each month, and keep up with the car payment. That should result in a strong credit score, which means you may be able to ask to have your cards' interest rates reduced.

Next, I want you to consider selling your home and moving into a rental. Next, ask your mortgage lender what your payment would be if the adjustment hit today. If the answer scares you, I want you to consider selling. If you can sell and make enough to cover your mortgage and moving costs, I suggest you do it now. The move will give you a better grip on tomorrow by reducing your costs today. Assuming that renting will free up some money, I want you to open two accounts that will help you establish peace of mind: an emergency cash fund and a Roth IRA. When you find full-time work in your chosen field—and you will, stay positive—you can revisit buying a home.

Q: My husband and I are working our way out of more than $14,000 in credit card debt. (We didn't pay our bills until we were about to be sued.) We've settled one balance for $9,000, and we're in the process of reducing another one. How can we remove these blemishes from our credit reports and improve our scores fast?

A: Your settlement was merely the second strike to your credit—the first was your delinquency. Honestly, I wouldn't look for a quick fix for your score right now. A higher number might give you easier access to money through extended credit card limits or better loan terms, but you and your husband need to focus on living within your means and examining why you accumulated so much debt in the first place. If you don't deal with the issues that caused you to overspend, you'll just repeat your mistakes.

Ultimately, your score should improve if you maintain a debt-to-credit ratio below 30 percent and pay every bill on time. (Go to to learn more about factors that can affect your credit score.) Unfortunately, there's no way to know exactly how long it will take to repair the damage, but stay vigilant—you'll get there.

Next: How to plan your way out of debt