Mon | Aug 8, 2022

Oran Hall | The consequences of not paying your debt

Published:Sunday | July 17, 2022 | 12:09 AM

QUESTION: How can you help me repair my credit report? — Kirk FIN ANCIAL ADVISER: I have been asked questions similar to yours more than I have been asked any other question since I started writing this column 14 years ago. Frankly, there is...

QUESTION: How can you help me repair my credit report? — Kirk

FIN ANCIAL ADVISER: I have been asked questions similar to yours more than I have been asked any other question since I started writing this column 14 years ago. Frankly, there is hardly anything new I can say, but I will summarise some steps you can take and examine some consequences of not paying your debt.

A credit bureau is an independent agency that compiles and stores data on the borrowing and payment history of consumers to assess their creditworthiness, which is expressed as a numeric or alphabetic credit score, the higher the better, used primarily by potential lenders with the accompanying credit report in deciding to extend credit, and on what terms.

The credit report is based on data that the following provide to the credit bureau: commercial banks, near banks, building societies, securities dealers, the Development Bank of Jamaica, insurance companies, the National Housing Trust, people in the business of selling goods under hire-purchase arrangements, credit bureaus, people who publish information on suits and judgments for debt claims, and entities exempt from the Money Lending Act.

To repair your credit score and report, pay off your debts in full or start paying them off in portions on a structured basis. You would need to have a discussion with your creditors.

To maintain or improve your credit score, pay your bills on time; incur only debt you can manage; check your accounts for errors; sort out any errors on your account; set up payment reminders; open new credit accounts responsibly; avoid maxing out credit cards; avoid closing out old credit card accounts, if possible, as the long credit history they carry can be helpful to your score if they have been serviced well.

To protect your credit score, be careful about guaranteeing loans for other people as their failure to pay principal and interest in full and on time could have a negative effect on your credit rating.

If in credit-repair mode, avoid making new applications for credit, sell some of your possessions if possible to pay down debt, make contact with creditors, and get professional counselling.

Although not all of your debt is reported to the credit bureau, there are consequences for not paying your debt. If you do not pay your rent, it is likely you could be evicted from the residential or commercial property after due process.

If you accumulate mortgage arrears, you risk the property being repossessed, thus causing you to lose a very valuable and important asset, often the most important for many people.

Failure to make hire purchase payments may result in the goods being repossessed by the provider of the facility.

However you take it, failure to pay debt results in a loss to the debtor in a variety of ways, including loss of reputation and the ability to fulfil meaningful goals.

Perhaps, the debt that does the most damage to borrowers is credit card debt. It seems the cards are so easy to come by and they are so easy to use for just about anything that the unsuspecting user ends up in a vortex debt from which there seems to be no escape.

The debt increases exponentially primarily by high interest charges and how they are computed, but also by penalty charges for late payment.

There are good and bad reasons why people borrow. Lifestyle is one reason. Perhaps it is not such a good one in that people may incur debt to keep up a certain perception of how well they are doing. Sometimes life circumstance change, but people borrow because they want to maintain the lifestyle of the past without the means to do so.

There are several life events which cause people’s financial situation to change. Sometimes relationships break down. There could be long-term sickness or disability, the death of a family member, unemployment, or redundancy. Considering the uncertainty of life events, it is important to make some preparation for them by gradually building a fund for these uncertainties. At least, saved funds can serve as a cushion.

Where credit card use is concerned, if you do not have the wherewithal to pay the bill when it is due do not use the card. In fact, decline the alluring offer from the card provider to accept the card. Cut it up to resist the temptation to use a card you cannot afford and discipline yourself not to use it beyond what you can manage.

Do not be flattered by increases in your credit limit. If you are not able to pay the bill at the higher level, just keep its use to the point where it is manageable. Use your credit card for convenience, not to incur debt.

The consequences of not paying debt can go beyond harm to your name and financial well-being. It can also have serious consequences for your mental and physical health.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and