In most cases, it's best to deal with creditors before you actually miss a payment. Creditors are much more willing to work with you if you've paid your bills on time. They're trusting that you'll continue to honor your obligations - even if it means paying only minimum payments or even less than the minimums if that's to agreement that you stick with.



If your credit is already shot, at other times, it's often more advantageous to negotiate with creditors after the debt you owe is so old that the creditor has practically forgotten about it. What do we mean by this? Let's look at the two following scenarios.

Say you lose your job unexpectedly. Statistics show that it's not easy (or fast) to find a replacement job. On average, it will take about one month to replace every $10,000 in income lost. So if you were among the top 1% of wage-earners in this country, and you had a six-figure job paying $100,000, it will probably take you about 10 months to find a similar-paying job.

Likewise, if you were earning $40,000 a year, on average, it will take you four months time to find a comparable-paying position. In the meantime, if you don't think you can pay all your bills, start calling your creditors immediately. Ask them to lower your interest rate, even if only temporarily. Again, credit card companies and other lenders are much more willing to be flexible for people who take the time to initiate the process of working out a payment plan, a reduced interest deal, or whatever.

But let's say you have an old debt: a $2,000 bill that you racked up three years ago from a department store. For whatever reason, you never paid that bill and the store has already reported your non-payment on your credit report. The department store has also "written off your account as a "bad debt expense." So if you come along now and offer to make a lump sum payment as a settlement in lieu of payment in full, chances are the creditor will go for it. After all, that company would probably rather get some money from you, than no money at all. If you work out one of these deals, however, make sure you get the creditor to first agree in writing that it will completely delete the negative history from your credit report if you send in the agreed-upon payment.

If a creditor just marks your past due account as "Paid" or "Paid as Agreed," that may do absolutely nothing for your credit score. They have to also agree to delete any references to late payments that they may have previously put on your credit report. Never let them "upgrade" your account status to "Paid Collection" or "Paid Charge-Off." Negative information can legally stay in your credit file for seven years, based on the date of "last activity." So changing your account to "Paid Charge-Off restarts the clock, adding another 7-year negative mark to your file.