My friend Jason was working as a journalist for a travel magazine when the recession hit. Thankfully, he did not lose his job and could still manage to sustain sufficient income for him and his family. However, Jason was also mindful that the situation could drastically change without fair warning. For instance, the recession could cause the magazine company he was working for to shut down due to a significant reduction in the sales of the magazine. He was aware that he still had debts to pay and many other expenses to take care of as the sole breadwinner of the house. So he decided to take a few steps he felt was necessary in order to avoid any financial problem later in the future. Little did he know that the drastic measures he took would cause his credit reference to take a nose dive.
Jason's credit reference was at an average level before he started doing some things to ensure he would remain with as little debt as he could. He started off by negotiating with one of his creditors to settle his debt. He owed the bank $ 10,000 but he could not pay them the full amount so he negotiated with them to reduce the amount he owed them and he would immediately pay the amount in one lump sum. It took several discussions and quite a long time before they finally agreed to his request and he only had to pay $ 7,000. Jason did not know that settling a debt would cause a dent on his credit report because the remaining amount of $ 3,000 that was forgiven by the bank was considered as a deficiency balance and the bank would report that remaining amount to the credit bureaus as a negative item. He could have arranged a deal with his creditors so that they would not report the deficiency balance but since he did not, his credit report remained as reported by his bank.
Jason knew that he would be able to bring up his credit card score if he was able to keep his credit card debts at a minimum. So he transferred the balance on all of his credit cards onto one single card with the lowest interest rate. Then he cancelled his other credit cards and kept the one that he had transferred his balance on. This would probably have helped him in a big way if he was delinquent in many of his credit card payments. However, Jason had a good clean record of maintaining the lowest balances on his credit cards and was rarely late on his payments. When he cancelled his credit card accounts, he was basically stopping the consistent good points of paying his debts on time. When the good points stopped, his credit score suffered a little. He also did not know that by transferring all the balances on his other cards to one single card, he was letting the only card that he had after he cancelled his other cards to carry a huge balance. That was a negative point right there.
In order to avoid debts from accumulating, Jason knew he had to stop shopping for more credit. However, he took it rather to the extreme and decided not to use credit at all. He started living on cash and practically demanded that his family members do the same. He did not realize that by not having a credit history he would not be improving his credit score report because credit scores generally depend on previous credit history from which to generate a score. He was also jeopardizing his future financial activities should he decide to apply for credit as many lenders use credit reports as basis for their approval. Many even use automated systems and rather than processing applications manually they may be more likely to decline such applications if they could not find any good credit record in the automated system. As Jason generally had good credit score and managed to maintain it, getting rid of all his debts would prove to be detrimental to his credit score.
When Jason checked his credit report he was utterly surprised to find that his credit score had dropped rather significantly. Probably it was not as bad as if he was to have bad debts or had to apply for bankruptcy but the drop in his credit score would probably cause many future lenders and creditors to be stricter when processing his applications.