By John Ulzheimer, credit expert for CreditSesame.com
I've written thousands of articles about credit reporting and credit scoring over the past decade. At this point in my career it's pretty difficult to come up with a topic about which has never been written by me or any other credit authors, but I think I've got one.
Over the past few years I've been compiling a list of real-life scenarios where people have played a metaphorical game of Russian roulette with their credit -- and lost. Here are two real-life examples of credit decisions gone wrong, and how their bad decisions lowered their credit scores.
Scenario No. 1 -- Refusing to make the correct mortgage loan payment.
In this real-life scenario the consumer had a mortgage loan with a well-known mortgage lender. Her loan did not have an "impound" account or a so-called "escrow," which means the lender was not collecting funds every month to use towards paying property taxes and homeowner's insurance. Those bills were being paid directly by the consumer.
The consumer fell on hard times and asked for a HAMP loan modification from the lender. HAMP, as you may know, is the Home Affordable Modification Program whereby eligible homeowners can have their interest rates lowered so they can continue to pay their mortgage on time. The problem is that when you ask for a HAMP loan modification the loan servicer is required to begin collecting a monthly escrow, unless prohibited by law. And when escrowing begins, your monthly payment goes up.
The borrower started getting monthly statements demanding a considerably higher payment. And despite the fact that she was clearly informed of the new escrow requirement, the borrower decided to ignore it and continue to make the normal monthly payment. That was a mistake.
When you make a deficient monthly payment, even by the due date, the payment is considered to be late. Sometimes the lender will deposit the check into a suspense account, which is a temporary holding account, until the debtor sends in additional funds sufficient to cover the oldest invoice. Eventually, however, the lender will start returning checks.
How did it end?
Not well. The borrower's credit report was littered with ascending late payments and eventually the mortgage lender began foreclosure proceedings.
What should she have done?
The borrower should have started paying the new, higher monthly payment. The overage was going to pay her taxes and insurance so it's not as if they were stealing money from her.
Scenario No. 2 -- Refusing to pay a credit card balance.
In this real-life scenario the consumer went to a holiday party at a hotel and paid $34 to have his car valet parked. According to the consumer, the party organizer was supposed to pay for parking for all of the attendees if they identified that they were there for the company event, which he admits he forgot to do initially. After a brief discussion with the parking staff about the valet bill, he charged it on a credit card and went home.
When the credit card bill came the cardholder called the issuer and told them that the charge was unauthorized. The card issuer contacted the merchant (the hotel) and after a few weeks informed the cardholder that the charge was not unauthorized and that he would be held liable for the $34. The angered consumer immediately closed the account and sent a payment for the full balance, minus $34.
How did it end?
Badly. Thirty days after the credit card issuer received the payment (that was almost in full), they sent another statement to the debtor. The balance was $34 plus a little interest. The cardholder refused to make any more payments and six months later the credit card issuer charged off the account and sent it to collections. Now the consumer has a charged off credit card account and a shiny new collection on his otherwise clean credit reports.
What should he have done?
The cardholder should have made the payment in full and on time. His beef was clearly not with the credit card company but when he refused to pay them what he legitimately owed them, he went into default. Credit card issuers don't play around when that happens, even over $34.