Following the crash of 2008, I owed more than $24,000 in credit card debt. There was only a few hundred in my checking account and very little prospect for work when, one day, my father asked me how I was doing, financially.
I demurred at that point but he was persistent, asking again and again over the next few months. Pride and fear refused to let me answer him honestly, though. I told myself repeatedly, I can do this. I have this. I struggled to find steady work and pay my bills while collecting unemployment, but it all eventually wore me down. He asked me one more time, promising not to become upset, and I told him everything: the sum total of all five credit cards was over $24,000, with the highest one totaling over $10,000.
In 2005, I had moved to NYC to start a new job, share a two-bedroom apartment and pay off four years of credit card debt from college. The burden of debt was heavy – I owed over $8,000 on one card alone – but I had pluck and determination and a complete lack of understanding of APRs. I made payments that just covered the finance charges and then some. It felt like progress, although I continued to use the same cards occasionally to pay for my new life in the city. I even paid off one card with a balance of about $2,000, so I felt especially confident that this was all under my control.
By the time the recession hit in 2008, however, my story changed: I now relied heavily on the cards instead of just paying them off. To make matters worse, I had switched to freelance work the year before and what had been so successful for me now became my worst enemy: work dried up and I couldn’t find a full-time job. I moved out of my studio apartment – which I proudly paid for myself for two years – to living with a roommate again in a bid to save money.
This is when the nightmare became worse: he would pay for the highest one if we worked out a debt settlement, and I naively agreed.
In simplest terms, a debt settlement means paying less than what you owe, whether it’s medical bills, personal loans, car repossession and private student loans (not federal). If you’re deeply mired in debt, you can negotiate with your creditor(s) and reduce the amount you have to pay. This does not mean they will automatically agree, however; private companies are under no legal obligation to accept a settlement simply because you say you’re unable to pay. Unemployment, economic hardship, medical issues, divorce and overspending (my scenario) are the usual reasons, and companies will screen you carefully before agreeing. It’s a step below declaring bankruptcy, brings down your credit score and stays on your credit report for up to seven years, all of which I discovered afterwards. I was 26 years old at the time.
In the ensuing five months, on my father’s advice, I refused to make any payments – which would have protected my credit score somewhat by keeping my account current – while we fought with the bank. Meanwhile, other credit cards either canceled my accounts or reduced the limits, then canceled, because of the delinquency. I felt panicky and upset because, except for a small blip during the recession, I always managed to make payments, maintain a decent credit score and was on good terms with the creditors. This was not me. I started to wonder what kind of mistake I had made.
Dealing with the company was no picnic, either: the collectors called every day, sometimes twice a day. One collector – Oren – was particularly vicious, telling me he knew I had the money and I needed to pay immediately.
Five months later, we reached an agreement. After interest and penalties, the total had passed $12,000 and they accepted $7,000. With a bleak credit score and only one credit card left to my name – an aggregate of balance transfers I insisted on paying back myself – I thought the worst was behind me and I could start nursing my credit score and report slowly back to health. I was forced to confront my spending in a way like no other and, this time, I was hell-bent on burning the lesson into my DNA. I chipped away at that one credit card, cut back on expenses and used my debit card or cash for purchases. As a business owner I understood the need for credit and credit cards so I wasn’t going to write them off completely – but now I would play by the rules of FICO and only when the time was right for me. This meant paying my bills on time, opening cards only as I needed them, and keeping the balances low (the suggested amount is no more than 30% of your total credit).
Then, in June 2010, I received my first offer in the mail. With cautious optimism, I applied and it was approved – for $500. I couldn’t have been happier. Here was my second chance, and I was going to do it right this time. I kept the charges small and the total no higher than $125 per month. When the statements came, I beamed as I paid in full. It was my most cautious relationship – as they slowly increased the limit, I only nominally increased my spending.
More offers came soon after but they all went in the trash (and still do). I only considered a card if it had a rewards program I highly valued (I accepted one, for travel, and it’s my main card now) or if I needed to make a large purchase and wanted to transfer to a card with 0% APR transfer offer (that’s my third, and final one). And I make it a point to keep the total across all cards less than 30%.
Although I was financially stable and making strides with paying off my one remaining debt while managing my other cards beautifully, there was still fallout. The opportunity to live on my own again came up a year later, and despite a stellar tenant history and endless referrals, the cancellation – that one black mark – destroyed my chances due to a credit score check. The anger and stress came flying back and I felt helpless as I realized I had to deal with this for possibly six more years.
While I managed to find another landlord who politely ignored that part of my report, I’m still wary, even fearful of what else could happen. I now have two years to go before the incident is removed, and anything can happen in that time. What about taking out a loan? Buying a car or a home? Any serious financial transaction and I will – rightfully so – be scrutinized, examined, questioned and probably rejected.
Ultimately, since I only have myself to blame – I did create that monstrous debt, after all – I also only have myself to rely on to put the pieces back together. And I’m doing just that: building up reserves, living entirely within my means, and most importantly, paying off my balances. In full.