If you've recently fallen behind on some of your monthly bills and see no income increases in your near future, you may wonder whether there are any options that can allow you to preserve your credit rating while offloading certain debts. You may also be weighing the consequences of not paying certain bills to determine which payments should be prioritized. While stopping payment on certain debts can provide you with the financial breathing room you need, there may be some unexpected consequences. Read on to learn more about the credit impact of various types of defaults, as well as what you can do to help keep your credit intact.
Which missed payments hurt your credit the most?
When prioritizing your debts, you'll first want to make sure the basics are covered -- food, clothing, and shelter, This usually means making sure your mortgage or rent is paid in a timely manner, as well as taking steps to create a small stockpile of nonperishable food and weather-appropriate clothing for your family. If you have any IRS liens or other debts that allow the government to garnish your wages, paying these off as quickly as possible should also be a priority.
Next, you'll need to focus on other secured debts (or debts that are attached to a piece of tangible property), like car loans. Having access to a reliable vehicle can be key in maintaining or increasing your income, and defaulting on a car loan when you owe more than it is worth could make you ineligible for future loans until your credit score has recovered. If you have student loans, they may also be subject to stringent repayment terms that can make defaulting an unsavory option.
Your last priority should be unsecured debts, like credit cards, as these can be easily discharged in bankruptcy and often carry high interest rates that make full repayment all but impossible. Although having these debts reported to the credit reporting bureau can damage your credit score somewhat, the impact won't be nearly as great as that experienced through foreclosure or auto repossession.
What can you do to keep your credit intact when dealing with an income crunch?
If you don't like the option of defaulting on any of your debts, you may still have a few choices. For those who still have good credit, refinancing unsecured debts into personal loans can provide you with a smaller monthly payment and a more competitive interest rate while eliminating the need to pay multiple credit cards due on multiple dates.
You may also be able to tap into your home's equity through a home equity loan (HEL) or line of credit (HELOC). These loans allow you to draw against the equity in your home by receiving a lump sum (HEL) or letting you write checks against your home equity (HELOC) while paying only a minimum monthly payment. Once the HEL or HELOC term has ended, any remaining balance will be rolled into your mortgage at a low interest rate.