First Person: The Perfect Storm of Credit

Yahoo Contributor Network

The best laid plans of mice and men often go astray - Robert Burns. Even with astute planning, following all of the suggestions, and dedication to keeping on top of your bills to make sure your creditors get paid on time; bad things can still happen to good people. Dramatic changes in the national economy can negatively impact your personal finance goals and ultimately cost you your most precious piece of real estate - your home. Lose a job due to a manufacturing plant closing during a recession; go from a six figure salary to unemployment, and use up all of your savings in a matter of months trying to keep current on your bills? You have run into the perfect storm that will eventually negatively impact your credit score and cause a credit downgrade to your credit history. One can easily go from having stellar credit to scores in the low 500's in a matter of months.

Tough decisions have to be made when unemployed. Eat or pay bills. In many cases there is not enough money to even make partial payments to your creditors. Each step you take moving backwards knocks a few more points off of your credit score. With virtually no recourse other than to beg your creditors for more time as you search for work and try to work things out financially, one is left with the simple fact that you cannot pay bills without any resources. One can quickly go from managing life to a fixed and working budget to being caught-up deep in a maelstrom of fiscal impossibilities. You can't pay bills with money that you don't have.

Speaking from personal experience, as damaging as a primary home mortgage foreclosure was to our credit score, what was even more damaging was the default on our second mortgage taken out on the home to pay for our children's college educations before the recession hit. With real estate markets reeling, our home became over/under, in other words, the market value of the real estate was less than the combined notes carried on the first and second mortgage. With the second mortgage being subordinate to the first mortgage, after the primary mortgage foreclosure was settled, there was nothing left for the second mortgage holder to receive. With nothing left to negotiate with, the holder of the second mortgage began to pursue restitution through aggressive action with collection agencies and eventually hiring an attorney to pursue further legal possibilities.

The major consequence of having a credit score in the low 500's is being virtually locked-out of the credit markets. Essentially your only option going forward is to pay cash for everything. Any personal finance strategy for purchasing or renting real estate becomes a pipe-dream if you can't come up with cash up-front or have a stellar cosigner lined-up to back you up. With bad credit your car insurance rates skyrocket. For employers that check your credit history as part of their evaluation process; well one can easily imagine how much tougher bad credit makes it to find a job with these types of employers.

Once damaged, restoring your credit score will take a total commitment to personal finance methodologies. Using a reputable credit repair service or even filing for bankruptcy may be your last hope. Credit repair services will negotiate on your behalf to establish re-payment schedules and terms that over time will allow you to improve your credit score. Personal bankruptcy in some cases will actually improve your ability to obtain "expensive" credit as the lenders know that you will not be able to file for bankruptcy for at least another 7 years.

*Note: This was written by a Yahoo! contributor. Do you have a personal finance story that you'd like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

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