I am a 23-year-old young lady. I had a spectacular credit history; all bills were being paid on time, loan and credit payments on par. However, mid-last year, I lost my job and everything went south. I was unemployed for over seven months. Based on the fact that I am a single parent of two children, it was not easy to survive on my savings alone for so long.

I am working now and I am doing my best to get all my bills up to date and back on track, but my credit has been ruined. How do I rehabilitate myself from such a devastating state that I would be able to get credit again?

Kelly

Answer:

You have moved from having a "spectacular credit history" to a point where you believe that your "credit has been ruined." You are now trying to get your bills current, so you have started the process of rehabilitation.

I am not sure how directly I can speak to your situation because of the gaps in the information you have presented - the period of your delinquency, what portion of the original debt is outstanding, the kinds of institutions you owe money to, and the type of debt.

Note that your credit history spans more than just the period of your difficulties. You have acknowledged that your track record was outstanding before your period of unemployment. That must have some value.

I cannot say how badly this period damaged your reputation. Is it that you made no payments at all, or that you made partial payments? Did your creditors have to take action in order to collect from you? Have you been denied credit since then?

Credit officers tend to look at your history in arriving at a decision. The assessment they make certainly influences the approach they take. What level of security will they require, for instance? What I have been able to glean from credit officers in various financial institutions does not suggest that your ability to get credit is dead.

The first thing to do when unemployment and other issues pose a challenge to your ability to service your debt is to make contact with your credit officer at the financial institution you have borrowed from - the earlier the better.

delinquent loans

Credit officers, I understand, treat their accounts on a case-by-case basis, so someone with an excellent record could get a more sympathetic hearing. Commercial bank loans not paid for up to eighty-nine days are classified as delinquent. Penalty interest is charged on the outstanding amount.

There are two ways to manage this situation. Clear the outstanding amount and revert to regular monthly payments. Alternatively, renegotiate the loan. This effectively clears the old loan but leaves you with a new loan so there is no penalty interest.

A loan that is past due for ninety days or more is termed a classified loan. Your bank will make full demand for the debt - principal and interest. Penalty interest is charged on the full balance. Such loans may also be renegotiated and any future loan must be secured. If you have a bank loan, the renegotiation option may still be open to you because you are now employed.

Although this does not apply in your case, banks may facilitate the making of minimum payments by borrowers if they are approached as soon as it is becoming evident that there may be problems to service the debt satisfactorily. Such action may prevent the loan from becoming classified. The minimum payment is determined on the type of loan and the amount.

debt servicing difficulties

Credit unions also recommend that their borrowers who are experiencing difficulties servicing their debt make contact with their credit officer. The approach they take depends on the type of loan and the nature of the delinquency. Loans may be accessed in the future if you re-establish your ability to pay your debts.

It is possible you may still be able to have a discussion with your creditors to arrive at terms that may give you a better chance of servicing your debt and reinstating your borrowing ability.

Whether you go the route of renegotiation or not, make your payments on time. Cut your spending if necessary. Save even a small amount regularly - your savings did help you in this crisis. Credit may have helped you in the past and may in the future, but go easy on it from here on.

Oran A. Hall is principal author of 'The Handbook of Personal Financial Planning'. For feedback email him at finviser.jm@gmail.com.