Oran Hall | Restoring your credit score

QUESTION: In 2019, I took out a credit card and always paid my bills on the due date. When COVID-19 came about, I had to use the card to help with getting food supplies for my household. I was then out of a job when my workplace was closed. Because of all of that, I was unable to pay my bill, and late fees and interest were charged to my account.

I recently went back to work and out of curiosity, I requested a credit report, and it’s not good at all. I’m now a high-risk E2 to be exact. I have contacted the bank in regards to a payment plan for each month and was told to pay a total of $38,000 before I can arrange a payment plan. I would like your advice on how I can actually fix my credit and how long it takes after clearing off the balance and being able to manage my credit to have it at the average level.

– Ann

FINANCIAL ADVISER: I do not understand why, but COVID-19 seems to have changed how you used your credit card. What is encouraging is that you have taken the correct approach in dealing with your credit card debt.

It is so important to have savings so that emergency situations can be addressed, but the credit card now seems to be the default option for so many people who experience cash-flow problems.

To your credit, you checked your credit score, made contact with the bank, discussed arranging a payment plan, and are now trying to determine how to manage your credit to bring your score to an acceptable level.

The standard is for a debt transaction to remain on the records of the credit bureau for a maximum period of seven years after the final payment is made, so it can affect your credit score for up to seven years.

There are cases, I have been advised, in which it can be removed from the records before the end of that time, upon a request being made to the credit bureau by the lender, and this would depend on the circumstances surrounding the matter.

As soon as you have satisfied the debt, you should request a letter saying that it has been settled, and the creditor can deliver it to the credit bureau.

As long as the particular debt remains on your record, it is factored into your credit score, so it does affect it, but to the extent that you incur new debts and service them satisfactorily, your score and credit-worthiness will improve. Bear in mind that a credit report carries the following: the value, term, and payment history of a loan; collateral information; court judgments; enquiries about the borrower; and demographic information on the borrower.

To further protect your credit, pay your debts on time, using automatic payment arrangements as much as possible. Monitor your credit score. Do not wait until there is a problem. You can request a copy of your report each calendar year at no cost and additional reports at a charge of $1,000 plus GCT or $1,500 plus GCT for each additional report, depending on the credit bureau from which you request it.

Additionally, do the following to help maintain or improve your score: check your account for errors, sort out any errors on your account, and set up payment reminders.

Many users of credit cards do not seem to consider that the interest rate is high, that unpaid interest is added to the principal sum owed, and that interest is charged on all of that. In no time, the sum owed can balloon out of control.

It should also be recognised that partial payments do not do much to help immediately. For example, if your bill is for $100,000 and you pay in full, there is no interest charge, but if you pay $70,000, interest is charged on the $100,000 and is reflected in the next bill.

For the cardholder, credit cards make the best sense when used for convenience, that is, when used in such a way that the holder can spend without having to use cheques or cash and is able to pay in full on or before the due date. When so used, the cardholder pays no interest.

The credit card problem keeps coming up. It is important to use credit cards carefully for the future can be so uncertain. Job loss – as you have experienced – sickness, and several other matters can come without notice and impair your ability to service your debt.

- Oran A. Hall, author of ‘Understanding Investments’ and principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.finviser.jm@gmail.com