Divorce Your Debt Before the Wedding

Dear Debt Adviser,

After years of financial trouble, I have decided to face my mistakes and turn them around to the best of my ability. I am engaged and don't want to get married until my credit is in good standing. Here is my situation. I am currently in debt for $5,158. One debt is for $3,480 and has gone to collection. It states on my credit report that the account will continue until September 2012. Am I better off waiting until next year for it to be closed, or should I pay it off? Two other accounts in collection total $1,678. I can fully pay them off soon. I was told the best way to rebuild credit is to obtain a secured credit card. Is this true? Another suggestion was to get a personal loan. However, with a low credit score of 595 I'm not sure I could get one.

-- Cyndi

Dear Cyndi,

I hope you don't plan to get married too soon. My guess is that you are at least two years away from having your prerequisite good credit for your marriage.

Your plan to pay off your two accounts totaling $1,678 is sound. I recommend you do so as quickly as you are able.

Now let's analyze the $3,480 account. After September 2012, the account will no longer be reported on your credit report. Negative accounts are only reported for seven years. The debt itself will not be closed, however, nor will it go away. It will just no longer be reported on your credit report or figure into your credit score.

To assess your options, start by checking the statute of limitations for collecting the debt in your state. The state attorney general's office should be able to tell you. If the statute of limitations has expired, it is no longer collectible. Even so, you will likely have to deal with the collection company. If the debt isn't past the statute of limitations, the collector could sue you, possibly resulting in a wage garnishment or bank account levy, plus a negative public record on your credit report. I recommend you try to work out a repayment plan if the debt is still legally collectible.

If the statute of limitations has expired and you decide not to pay, then communicate to the collector that you understand your rights and the debt is no longer legally collectible. The good news is that the account will no longer be a negative on your credit report once it is removed in 2012. However, don't be surprised if this old debt is resold to a succession of new collectors, each of which will make an initial effort to collect it.

To rebuild your credit, it is very important that you make payments on your other current accounts on time and at the agreed terms. New, positive information on your credit report is the best way to offset the negative collection items. A secured credit card is a good way to get started. You can search Bankrate's 2011 Credit Card Fees survey for a secured credit card that best fits your needs.

A personal loan is also a great way to add positive information to your credit report. With your low credit score, though, you may only qualify for a passbook savings loan. These loans, like a secured credit card, are secured by a savings deposit you keep with the bank lending the money. If you decide to apply, be sure to ask if the lender reports the loan to the major credit bureaus.