An issue on which I see very little discussion is the notion that you have to do whatever it takes to protect your credit score and report, including borrowing – especially going into credit card debt. The theory is you stop at nothing to keep negative issues off your report and hope your borrowing strategy works out some day.

My story is that 10-12 years ago we felt we had no choice but to rely on credit cards to make ends meet, so that we could avoid foreclosure on a home we no longer lived in and were trying unsuccessfully to sell. Our options were to stop making payments on the mortgage to focus on our living needs, sign the deed over to the bank (deed in lieu of foreclosure), or borrow to make the payments to protect our credit score and prevent a lawsuit from the lender. At one point, an attorney offered this advice: The difference between a deed in lieu and foreclosure is like the difference between getting hit with a baseball bat or a billy club. We would rather have neither!

We did protect our credit score/report, but we went into $20,000 of credit card debt in the process. We eventually had renters in the house, but when they defaulted we lost about $6,000 in rent and racked up a $6,000 legal bill to evict them, mostly because they fought it and were dishonest.

I recently worked with a client who is in this same scenario, vigorously going into credit card debt to protect their credit score. I told them I can't say convincingly that the $32,000 financial mess we got into was worth a good credit score/report or if it would have been better to take the credit score hit. And I can't in good conscience recommend to clients to go into this kind of debt to protect their credit score without giving them options and information.

With nearly everything today tied to credit scores – car insurance, all new loans, even some doctors, and many other transactions – this is becoming a much bigger issue. In our society's quest for automation, we have forced many into precarious financial situations, which ironically is what reliance on credit scores and credit reports was intended to prevent. The unfortunate side effect has been financial discrimination – often a flat refusal to do business with “financially distressed” people – but only because a computer located who knows where says so based on algorithms no one can understand.

Unfortunately there is no hard and fast answer to offer everyone. Your best solution will always be to try and work out a resolution with the lender if you think you will have a problem making ends meet. But, remember, they will not work with you forever.

Your next best solution is to offer a written explanation on credit issues up front in an effort to override the effect of automated financial discrimination. Expert guidance such as from a financial planner is necessary to help you navigate through these treacherous waters. Zacchaeus Financial Counseling, Inc. has the experience and the skills to offer this help.


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    Climbing the Money Tree


    R. Joseph Ritter, Jr. CFP® is a CERTIFIED FINANCIAL PLANNER(TM) and founder of Zacchaeus Financial Counseling, Inc., a non-profit organization providing financial planning services to low-income households and households experiencing financial strain.

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