Q: I am a business owner and due to economic downturn our business receipts are down by almost 40 percent. I’ve been using my credit card to help keep the business afloat and my credit card debt has gone very high.
I am starting to have difficulty paying my home mortgage each month. I have contacted consumer credit counseling services and they are working on helping me with a credit card repayment plan. They also suggested I apply for a home loan modification.
Am I taking the right steps or are there some other alternatives I should consider? Also, how will my credit rating be affected by these moves?
A: If you have maxed out your credit cards, and are having trouble making your mortgage payments, you need help in figuring out how to get these amounts in line with your income.
As difficult as it might be, the best personal finance advice I can give you is that a properly designed and administered debt management plan is a good way to go. If you need a debt management plan, your credit history and credit score have likely already suffered either because your debt-to-credit limits are out of whack or because you have started to pay some of your bills late.
Joining a debt management plan shouldn’t affect your credit negatively and as you start making your payments on time and in full through the plan, your credit history and credit score should improve, as you feel more in control of your debt. In some cases, debt management plans will hurt your ability to get new credit but should make it easier for you to get yourself back on track financially.
But you need to make sure you work with a reputable credit counseling service provider. Many people choose to work with credit repair companies or others who claim to assist people that have credit and cash management problems. But in some cases, these companies will take a cut of the money they take in and renegotiate debts or manage the payment of the debts to creditors, but then they pay late or pay less that what is owed, or they do nothing at all.
When you pay less than what is owed to a credit card company or other creditor, that short payment will cause your credit history and credit score to suffer.
If you qualify, getting a loan modification should help your credit history and score as well – once your loan modification is finalized and you make your payments in full and on time, your credit history should show that you are current on your loan and paying on time.
Homeowners have been concerned about how loan modifications will be reported on their credit history. According to the mortgage servicer portal administered by Fannie Mae, if you’re current on your mortgage payment when you enter a loan modification, you should be reported as current through the trial loan modification period, even if you’re paying less than you were previously. If you are delinquent on your mortgage when you enter the trial period, the loan servicer may continue to report you as delinquent on your payment and workout status.
According to the Consumer Data Industry Association, lenders can report payments on a loan modification using an existing “Special Comment Code AC (paying under a partial agreement) and during a trial loan modification, the code is included on the borrower’s credit report.” This code can be used after the trial loan modification is made permanent.
As of November 1, 2009, mortgage lenders will be able to use a new Special Comment Code – CN (loan modified under a federal government plan). This new code is “not intended to be negative or impact current credit scores,” writes Demitra Wilson, an Equifax spokesperson. She adds that most likely, “modeling companies will wait until sufficient history has been collected to determine how this new code should be treated.”
“Generally speaking, the impact on a borrower’s credit score depends on the specific credit score used (i.e. FICO, Vantage Score, PLUS Score, etc.),” Wilson noted in her email. “In addition, a number of other factors such as a consumer’s overall credit history and their credit mix can also affect the impact of a loan modification on a consumer’s credit score.”
What does this mean for you? The mixed messages suggest that the mortgage industry itself isn’t all that clear on what a loan modification means in terms of risk. You’d think that lowering someone’s mortgage payment and making it more affordable would be a good thing – that the borrower would be less likely to default.
But so far, 68 percent of those receiving loan modifications do re-default. The bottom line is that if you’re having trouble making your mortgage payment and your lender agrees to give you a loan modification that lowers your monthly payment, hopefully it will be easier for you to make those payments on time.
And paying your bills on time and in full is the cornerstone to a solid credit history and a good credit score.