Don’t be like that guy!

by Tom Tousignant

in Blog, Financial Safety, Mortgages, Refinancing, Wealth Building

WARNING: This a graphic story of the financial destruction of an otherwise financially successful man.

Here’s a secret for you – your credit score will go down every time you do something that people did previously just prior to defaulting on their debts.  The credit scoring model is trying to predict the likelihood of you going 90 days or more late on an account.  If someone ever defaults on a debt, they leave clues well in advance of that default.

Here is the pattern of clues John left as he trashed his credit following a medical incident that left him out of work for a few months:

  1. John needed some cash, so he applied for new credit.
  2. Having a lot of equity in his house, John applied for a home equity line, but the application was denied since he wasn’t working.
  3. With the financial pressure of medical bills and no income, John could no longer pay off his cards in full each month.  The amount owed starts to increase close to the limit on the cards.
  4. Needing cash, he turned to alternative sources, getting a signature loan at a high interest rate.
  5. He was late on a few credit card payments as the money just wasn’t there to make the payments on time and he was juggling the many open accounts.
  6. Creditors turned over John’s accounts to collection agencies, who immediately notified the credit bureaus of the collections.  Collection agencies wanted to lower his credit score to prevent him from opening new accounts, leaving him with a greater chance of paying the collection agency off.
  7. (Trying to sell his house didn’t help as the market was slow and declining, so his equity was disappearing).
  8. John first went to a credit counseling firm and then eventually filed for bankruptcy.
  9. Some debts were wiped out in the bankruptcy, and he just quit making payments on the remaining debts, feeling the situation was hopeless.
  10. Creditors file suit and judgments get reported to his credit report.
  11. Being unable to manage then debt load, he is late paying his taxes and a tax lien is filed in court against him.
  12. Unable to even make his mortgage payment with the high costs of his other bills, the house is lost in foreclosure and all the equity in the house disappears in the soft real estate market.

John’s credit destruction was now complete after just a few tragic months.  The impact will last for years, as most of these items will impact his score and stay on his credit report for seven to ten years.

While this story is a myth, the events and results happen to good people every day.

Following the strategy would have helped:

  1. Always have an emergency fund – this would have tied John over during the short period when he wasn’t working.
  2. Keep credit cards and other loan payments very low
  3. Have proper insurance against all the threats out there – not just uninsured motorists, but illness, sickness, death or lawsuits as well.
  4. Store your cash where is can be accessed.  In the above story, John had over $200,000 of equity in his house – but with no job, he couldn’t access it and lost his house in addition to destroying his credit.

Your mortgage can’t be just a loan to be hated – today it has to be an integral part of your overall financial plan to help you succeed financially.  Could you survive two months without work with the increased expenses of a health issue?  If not, what are you doing to make sure you have a different outcome?

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