Debt Reduction is more Important than Your Credit Score

If you are a baby boomer with a pile of consumer debt, you are not alone.  Many economists and members of the younger generations are blaming us for the dramatic rise in the use of consumer credit.  We baby boomers are also accused of inflating then collapsing the housing bubble.

At this point, I don’t care who is to blame for all of the credit abuses.  Mrs. GoTo and I don’t have any consumer debt but we are anxious to expedite our recovery from the beating our retirement accounts received in 2008.  No doubt that other baby boomers feel the same way, including those with significant credit card debt to worry about.

According to a report from the New York Times, credit card companies are showing increased flexibility with consumers who have significant card balances and who are struggling to pay them off.  Although nothing is being publicized by the lenders, it seems that they are negotiating balances downward in exchange for some assurance of prompt payment.

For younger borrowers, negotiating a write-off of a credit card balance would be problematic because of the significant negative effect that would have on their credit score.  For baby boomers, I am suggesting that you consider ignoring that problem.  At this stage in our lives, preparing for retirement means preparing to live with as little debt as possible.  (We in fact are striving to achieve a mortgage-free life.  I don’t want to have to worry about having the income needed to make a mortgage payment.)

Your credit score will help you get better rates on loans but loans are not what baby boomers in extreme debt should be focused on.  Rebuilding the retirement nest egg is more important.  Overcoming losses in retirement accounts requires extreme yet conservative measures.  The conservative part is the reduction of consumer debt.  The extreme part (for those who need it) is a willingness to negotiate some of that debt away without regard to its effect on your credit score.

So, if I were a baby boomer with significant credit card debt and with poor prospects for repayment in the immediate future, I would go into negotiation mode with the credit card issuers.  I am not suggesting that you sign up with one of the many debt reduction businesses that are likely to do more harm than good.  Nor do I recommend conventional (non-profit) consumer credit counseling.  Often, those counselors will try to put you into a debt management plan that does not include balance write-offs.  (If they will do that for you then go for it.) 

Instead, try to do the negotiating yourself, directly with those to whom you owe the money.  First you will need to accumulate a fund that you can use for a lump sum partial payment of one of your credit card balances.  Offer to send it immediately if they will accept it as payment in full.  Then move on to the next debt.  The worst that can happen is they say no.  Based on recent anecdotal evidence, they may say yes.

The bottom line for baby boomers who are in debt and close to retirement is now is the time to kill that debt by any legal means available short of bankruptcy.  I would do this even if it causes your credit score to drop.  You can’t eat in retirement on a high credit score.

This week Mr. GoTo’s writing was featured in the Carnival of Personal Finance and the Consumer Focused Carnival of Real Estate. 

Photo credit:  Steve Woods

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