Is Your Goal to Get Out of Debt or Stay Out of Debt?

debt questionAs an ally of The Debt Movement, author and facilitator of a program called BKF University, my goal is to help both get and keep people out of debt.

Many times however, I come across students and readers who are not sure of their overall financial goals – even though they are pretty sure of them in the beginning.

Just recently the following question was asked in the Debt Movement Facebook fan page:

Question about debt if I may. Is it better to pay off all old debt to raise your credit score? I was told if you pay off all your old debt it can hurt your credit score because then nothing reports to the credit bureau

I believe all questions on specific paths should be answered according to the planned financial goals of that person asking. Though a great question, part of it insinuates getting out of debt as their goal and another part involves staying in debt as a goal.

Your unintentional goal to stay IN debt

Assuming that  a person’s ultimate goal IS to stay in debt, then no, paying off old debt will not hurt your credit score the majority of the time.

FCRA stipulation of 7 years and/or is no longer being reported for some other reason, there can be times when the collection agency or creditor will re-age this account as a new listing on your credit report.

In this case you will need to dispute heavily with both the original creditor and the credit bureau and while citing the FCRA as a reason.

If you’re simply referring to debt that is currently past due in collections, paying off that debt (or making a settlement for a lesser amount) will have no affect at all actually.

Showing that the debt has been satisfied will assist as an addition to your low FICO score when applying for loans because many lenders do not want to see collection accounts that have not been taken care of on your report.

But your score will still take into account that you have a seriously negative/derogatory item – paid or unpaid. Only time can “improve” that situation. And remember, removing accurate negative items from your credit report is a federal crime.

Next, if the debt you’re attempting to paying off is simply debt that is current yet you have been paying interest on it since Bush was in office, it will actually increase your score over time.

This is because your credit utilization ratio will have been improved.

Your intended goal to stay OUT of debt

…will allow you financial freedom.

Now if your goal is to get out of debt, stay out of debt and no longer pimp your delicate income out to interest payments on the other hand, your aim should be to never worry about a credit score.

It’s your cash and credit REPORT that is important to be financially stress free and to build wealth in this scenario. There is nothing you will need a credit score for that is beneficial to you other than getting back INTO debt.

When you are truly on a debt free journey and you begin living within your means, you will no longer be borrowing money. This sooner or later will cause your credit score to drop substantially.

And not being able to obtain credit could be the very best thing that has ever happened to you financially.

For instance, if you notice, you will hear a lot of people tell you (untruthfully) that they pay off their credit cards every month when in fact 1 out of every two people you hear say that doesn’t.

And the ones that do carry revolving balances pay for the reward points of those who don’t. It is the necessary cycle of the credit card industry for if everyone paid their balances off and weren’t sinking in debt, there would not be a single credit card in circulation. (This is even more dramatic if you are Black or Latino with a credit card account.)

These are the same people who are stuck in a debt cycle forcing them to believe they can’t live without credit. Sure they are getting 4.5% interest rates on car loans but every month they have a car loan to play in the first place. This does not have to be you. So in summary:

  • Goal A: Stay in debt. Pay off your old debt and it will either help your credit report or change your debt utilization ratio thus increasing your FICO score over time.
  • Goal B: Get out of debt and stay out of debt. Pay off your debt regardless of what a credit score will indicate, live within your means, invest your money and live a wealthy life.

All lanes point toward paying your debt, however, which ultimately is the essence of The Debt Movement.

Oh and one caveat: paying off debt that is delinquent and outside of your state’s Statute of Limitations for that type of debt, is essentially a donation. You are no longer legally liable for this debt, however, pay it under your own moral obligation.

 

About the Author:

Jarim Person-LynnJarim Person-Lynn, Author of Brass Knuckle Finance, Financial Activist and Wealth Coach. Jarim Person-Lynn knows all too well how the trappings of debt and poverty can derail the dreams of the inner city youth. Growing up submerged in the flashy L.A. culture throughout the late 90s/early 2000s, he was taught to buy first then think about how to pay for it later. Ultimately he found himself working day and night to pay off someone else’s life. 

After a few false starts and partial escapes from old ways of thinking, Jarim got completely fed up with his situation in 2009 and vowed to eliminate the cycle of poverty and the “Keeping up with the Joneses” status quo that had tried to claim him and so many people he knew in his community.

  • g_zierdt@msn.com

    Jarim, great post about financial goals and attitudes about debt. I know I’ve gotten out of debt a couple times in my life, but I struggle with staying out of debt. Ironically, it sounds pretty similiar to losing weight versus keeping the weight off. Getting out of debt and staying out of debt seem like different mindsets and making the transition eludes me.

    • http://www.facebook.com/jplynn Jarim Person Lynn

      Thanks for that!

      I had a lot of starts and stops myself up until the point where I got completely fed up once and for all.

      Once I did get fed up, to get to the decision of not only getting out of debt but staying out of debt, I was stuck at a decision on what to do with my credit cards. Contemplating whether I should keep my newly paid off credit cards open, I simply asked myself “is it worth it”?

      And at that point I figured out what risk vs reward was. A very simple ratio/way of looking at things that can provide you more wealth that you can ever imagine.

  • K. Esquivel

    Great post! If you don’t learn the lessons of the past and completely change your mindset, you will definitely fall back into old patterns. Until we stop believing “good credit” is necessary and FICO scores define us, people will continue to try to build it up to buy more and more and then end up deep in debt.

    Keep doing what you’re doing with Brass Knuckle Finance.

    • http://www.facebook.com/jplynn Jarim Person Lynn

      Yes and thank you for helping out at BKF University with our single moms every week. You rock!

  • http://www.facebook.com/KattyKoo Katherine Harris

    Until I recently began my endeavor to get out and STAY out of debt, if asked I would have said these were one in the same but they definitely are not! Each day as I learn more, dig deeper into my own situation, I realize that it starts with your mindset! If you don’t change that you will eventually get back into debt even if you do get out! Thanks for the article and especially the info on the statute of limitation of different types of debt! It was very helpful!!

  • http://couplemoney.com Elle Martinez

    Loved the post! We’re working at staying out of debt. Once we paid off our car loan we decided to buy cars with cash.

    • http://www.facebook.com/jplynn Jarim Person Lynn

      Thanks so much! If I may ask, are you purchasing real estate in cash as well with you and your husband’s awesome dual income?

      • http://couplemoney.com Elle Martinez

        We already have mortgage from years ago, but we’re paying extra on it and we’re also sending in extra on the student loan. We shortened the mortgage by a few years already and we knocked off a year on the student loan. using the Debt Movement to motivate me to bump up the student loan snowball.

  • http://www.facebook.com/joanotto Joan Concilio Otto

    This is a wonderful question! We describe ourselves as “done with debt for life” already – even though we’re still paying it off. It’s kind of like living the future vision. And we are definitely of the “no debt ever” mindset, the hardline one (like not even a mortgage or a car loan!)