True love: still together after wife runs up $10K bad card debt

This post originally appeared September 17, 2015 on CreditCards.com as “Spouse committed fraud, ran up debt, but we’re still together“

By Barry Paperno

Dear Speaking of Credit,
I was a victim of familiar fraud. A spouse opened multiple credit cards in my name. I had a pretty good credit score before this all started and my spouse was able to obtain $10,000 worth of credit, of which all has been utilized. None of this did I find out about until I was served a civil summons for one of the debts.

I chose to handle this personally because I, after much deliberation, am still with the person. I have taken over all finances and am making an attempt to pay off these debts. All of these credit cards have gone to collections at this point, so I will be dealing with them rather than the original creditors. I have one account open that I opened, besides my student loans, that is a personal loan, which is nearly paid off.

Would it be smarter to refinance this loan that is in good standing to pay off these delinquent accounts, or pay it off and continue paying on these accounts in collections? Would having one less account on my credit report be better than having a couple accounts closed, but a new inquiry and a new account? — Joe

Dear Joe,
As dire as your debt situation may seem, I have good news for you. No, you’re not going to be looking at an 850 score anytime soon. But, if you’re looking to set your score on a positive track while lowering your debt, consider the journey well underway and your score headed upward.

You currently have two important scoring forces already going for you and a score that is probably better now than when the last of your cards landed in collections. And, as long as no new collections hit your credit report, it’s likely to continue getting better, because:

  • Among the most important set of scoring calculations are those that measure the length of time since the last debt was assigned to a collection agency.
  • The recency of the latest collection item is determined by the number of months since the “assigned” date.
  • The length of time since your last collection is more critical to your score than the number of collections you have or the amount you owe.

What this means for your score is that within the most heavily weighted of the five major scoring categories — payment history — your score essentially “bottomed out” when the last of those debts went to collections. Since then, your score has most likely been on a slow-but-steady upswing.

Another scoring dynamic working in your favor is that negative items on a credit report cause less damage when in the presence of positive credit, such as your personal loan and, if also in good standing, your student loans. The more positive items you have on your report, the better.

This last point leads me to your two specific questions that address the balancing act of trying to do right by both your credit score and your finances: Would it be smarter to refinance this loan that is in good standing to pay off these delinquent accounts, or pay it off and continue paying on these accounts in collections?

Unfortunately, with most of that $10,000 debt now in collections and your credit utilization (balance/limit ratio) maxed out, it’s doubtful that your score, despite being on the upswing, will qualify you for a refinance of your personal loan at reasonable interest rates anytime soon. But, if you are able to find good terms, refinancing and using the proceeds to pay off some collections could be an excellent way to pay down some debt while adding a positive loan to your credit report.

If, however, the terms of the refinance will have you paying more toward interest than collection balance reduction, perhaps consider an alternative found in my answer to your second question.

Would having one less account on my credit report be better than having a couple accounts closed, but a new inquiry and a new account?

The number of accounts on your credit report is not only one of the least important credit scoring factors, it’s also not something you have control over anyway. Closed accounts remain on your credit report and continue to be counted by the credit score for years to come until eventually falling off due to old age.

New accounts and inquiries affect your score more than the number of accounts, though their impacts, whether good or bad, tend to be more of a concern with scores above 700. What this means for you is that there’s little need to worry about negative effects from additional inquiries and new accounts until your score gets much higher.

Going back to what I said earlier about the benefits of having positive information to offset the negatives, your score could also benefit from the addition of a credit card or two in which you make small charges and pay them off each month without interest. And, for credit rebuilding purposes, a secured card with a low limit, no annual fee and no minimum score requirement is probably your best bet. Besides being treated no differently than an unsecured card by the credit score, an especially nice feature of many secured cards is that they automatically convert to unsecured after a year or two.

Good luck and keep up the good work!

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