Is Paying Off Or Settling Debt Better For Your Credit
In general, paying off the total amount of debt you owe is a better option for your credit. An account that appears as “paid in full” on your credit report shows potential lenders that you have fulfilled your obligations as agreed, and that you paid the creditor the full amount due.
Accounts remain on your credit report for up to 10 years when they’re closed in good standing . Positive payment history on those accountsthe most important factor in your credit scorewill continue to strengthen your score during that time. The growing length of your credit history can also have a positive impact on your score.
You can pay less than the full amount owed if you negotiate with a lender to settle the debt. Debt settlement companies offer the option to settle debt on your behalf for a fee, but there are many drawbacks to this process, including shattered credit and high fees. Instead, negotiating with lenders on your ownor considering a debt management plan organized through a nonprofit credit counseling agencymay be better options.
No matter how you settle debt, anytime you don’t repay the full amount owed, it will have a negative effect on credit scores. The “settled” status will remain on your credit report for seven years from the original delinquency date of the account. If the account was never paid late, the “settled” notation will stay on your report for seven years from the date the debt was settled.
What To Do If You Want To Pay Off Debt Instead
If youd rather avoid a debt settlement, consider your options for paying off what you owe. For example, you could try a structured debt payoff, meaning you and the creditor agree to specific terms on how much youll pay each month. Your creditor may be willing to offer a restructured payoff plan if youve experienced a financial hardship or youve shown that youre committed to repaying whats owed.
You can also look into options for making your debt less expensive. If you have high-interest credit card debt, for example, transferring it to a 0% APR balance transfer card could save you money. Just keep in mind that youll have to pay the balance in full before the promotional period ends and before the regular variable APR kicks in to avoid interest charges. And you may also pay a balance transfer fee, depending on which card you choose.
A debt consolidation loan is another option. Debt consolidation loans allow you to pay off multiple debts and then make one payment to the loan going forward. A debt consolidation loan or personal loan could make sense for paying off debt if you need to borrow a larger amount of money and if you can qualify for a lower interest rate.
You could also use a home equity loan to pay off debt, though there is a caveat. Home equity loans and home equity lines of credit use your home as collateral. If you default on the home equity loan or HELOC, you could risk losing your home to foreclosure.
Myth No : Debt Settlement Wont Hurt My Credit Score
The truth: Debt settlement can hurt your credit score almost as much as bankruptcy.
Although asking for a settlement on your own wont hurt your credit score, succeeding in getting a settlement or skipping payments as some settlement companies advise definitely will.
Defaults, settlements and similar events dont affect your credit score until they are reported, says R. Glen Ayers, attorney and former bankruptcy judge. But of course these are usually reported.
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What Sort Of Debt Should I Settle
Since most creditors are unwilling to settle debts that are current and serviced with timely payments, you’re better off trying to work out a deal for older, seriously past-due debt, perhaps something that’s already been turned over to a collections department. It sounds counter-intuitive, but generally, your credit score drops less as you become more delinquent in your payments.
However, bear in mind that, if you have an outstanding debt that was sent to collectors more than three years ago, paying it off through a debt settlement could reactivate the debt and cause it to show as a current collection. Be sure to get this straight with your creditor before finalizing any agreement.
A debt settlement remains on your credit report for seven years.
As with all debts, larger balances have a proportionately larger impact on your credit score. If you are settling small accountsparticularly if you are current on other, bigger loansthen the impact of a debt settlement may be negligible. Also, settling multiple accounts hurts your score more than settling just one.
When Card Debt Is Sent To Collections
Using the most widely used FICO models, once a bad debt has been sent to a collection agency, it will no longer matter to the score whether the debt is ultimately paid in full or settled. Unlike a debt settled at the charge-off stage, no such reporting change occurs when a collection goes from unpaid to either paid-in-full or settled.
The date the debt was assigned to the collection agency tends to be the only date that will ever be used to measure its recency, regardless of the eventual outcome.
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Know Your Negotiation Options
Before negotiating with a credit card company on your own, you should get familiar with the types of settlement options that are typically available to consumers. If the credit card company is willing to entertain the idea of a debt settlement, then the odds are high that they will want to make one of the following arrangements.
Be Familiar With Your States Laws
If the debt collector attempts to charge you fees or interest, check your state usury laws. These laws put limits on how much interest a creditor may charge.
Make sure the debt collector is in line with state law. Otherwise, its time to let them know that youre aware of your rights and that the agency is violating them.
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Researching Debt Settlement Companies
Before you enroll in a debt settlement program, do your homework. Youre making a big decision that involves spending a lot of your money money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. They can tell you if any consumer complaints are on file about the firm youre considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.
Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies youre considering, including news about any lawsuits with state or federal regulators for engaging in deceptive or unfair practices.
Is Credit Card Settlement A Good Idea
Typically, youre advised to avoid credit card settlements because of the impact they have on your credit score. However, depending on your current situation, you may have no other choice but to settle. For this reason, it is important to know how to negotiate credit card debt settlement yourself as it allows you to apprßoach the issuer and avoid the fees associated with hiring a debt settlement agency. The bottom line is that to avoid a situation where you need to resort to a settlement, ensure that you spend only what you can afford via your credit card and clear bills on time. To simplify the latter, opt for a credit card issuer that allows you make payments via multiple payment gateways. The Bajaj Finserv RBL Bank SuperCard is one such option as you can pay using any of the 6 payment options. Among them is the RBL MyCard app that allows you to pay your bill in just a few taps. Use this feature to ensure that you never miss a .The SuperCard also allows you benefit from various credit card offers on lifestyle, entertainment and utility purchases. Additionally, you earn reward points on every transaction, facilitating greater savings, of up to Rs.55,000 per year. To enjoy all these benefits and more instantly, all you need to do is check your pre-approved offer online. Apply using a customised credit card offering and get quick approval.
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Advantages And Disadvantages Of Debt Settlement
Debt settlement can be the best way out of a financial mess, but it is full of pitfalls, and the Consumer Financial Protection Bureau warns: Debt settlement may well leave you deeper in debt than you were when you started. The biggest problem is convincing a creditor, or multiple creditors, to accept less than they are owed. Creditors arent obligated to enter a settlement agreement, but many are willing if they believe you cant pay and otherwise will file for bankruptcy protection. If that happens, it means they receive little or nothing.
Some people hire a debt settlement firm to represent them, but others negotiate themselves. The advantage to contracting with a debt settlor is saving time and avoiding the hassle of negotiating yourself. But the CFPB warns: Dealing with debt settlement companies can be risky.
If you decide to pursue debt settlement on your own, it will be vitally important that you educate yourself on the details of the debt that you owe, develop a realistic plan on how much you can save each month based on your current financial situation, and negotiate with creditors or collectors with a sensible repayment plan that they will agree to in writing.
Call Your Credit Card Company
Consumers can use a settlement company , or they can do it on their own, says Linda Jacob, a financial counselor with Consumer Credit of Des Moines. Theres no need to pay a company to settle for you. Save the fees and do the work yourself.
If youve decided to negotiate on your own behalf after weighing your options, its time to call your credit card company. First, ask for the department that handles debt settlements or collections. You may want to prepare a script beforehand, so that you know exactly how to frame your request.
Clearly and politely explain your financial situation and ask for exactly what you want. The initial answer may be no, but that doesnt mean you cant be persistent even if it takes multiple phone calls.
Document every conversation you have. Write down the names and job titles of anyone you speak to so you can reference them in follow-up calls if necessary.
You cant be afraid to ask for a supervisor or the supervisors supervisor, Sullivan says. The higher you go, the more likely you are to find someone who is willing to make a concession.
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How Bad Is Debt Settlement For Your Credit
Debt settlement programs are regularly advertised as a way of getting out of debt by paying just a fraction of the amount you owe. These programs typically enable you settle debt for 25% to 80% of your total debt if they work at all. But how bad is debt settlement for your credit, and what is the impact of a debt settlement program when compared to other alternatives for debt relief? Heres a short primer on How bad is debt settlement for your credit? that provides some answers.
How Credit Card Debt Settlement Works
To get the ball rolling, you should contact the creditor and make an offer to settle the debt. A credit card company might accept a settlement if you’re very delinquent on your payments. It’s often less costly for a creditor to accept a lesser amount in settlement than it is to send the account to collections, file a lawsuit, obtain a judgment, and then try to collect on the judgment.
Example. Janet has a $10,000 credit card balance. She hasn’t paid the bill in nearly a year. She has managed to save $6,000, but she’s so behind on other bills that she can’t afford to save any more money. She contacts the credit card company and offers to settle the account for $5,000. After some negotiation, Janet settles the debt for $6,000 and pays the entire amount to the creditor. The creditor writes off the remaining $4,000 balance and reports to the that the debt was paid in full by settlement for a lesser amount.
For help in crafting a settlement offer, get Nolo’s eForm Offer to Settle Debt With a Reduced Lump Sum Payment.
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How To Begin Improving Your Credit Score
If you’ve had financial troubles in the past, but now you’re working to improve your credit, you’re on the right track. A good first step is to bring any past due accounts current. More tips for building and maintaining good credit scores include:
- Make all payments on time going forward. Your payment historywhether you make all payments on timeis the most important factor in credit scores. If you are ever in a situation where you may not be able to make a payment on time, you should contact your lender to discuss your options before the account becomes delinquent.
- Reduce balances on revolving accounts. The second most important factor in credit scores is your utilization ratethe amount of credit you’re using relative to your overall credit limit. If you tend to carry high balances on your credit cards, reducing that debt load will improve your utilization rate.
- Enroll in Experian Boost. With Experian Boost, you can sign up to have your positive utility, internet, cable and phone bill payments added to your credit history, which can help your FICO® Score. Once you enroll, you’ll immediately see an impact.
- Focus on your risk factors. If you haven’t already, request your credit score from Experian and pay close attention to the risk factors provided with your score. These factors tell you what you need to do to improve your credit scores.
Thanks for asking,
Jennifer White, Consumer Education Specialist
This question came from a recent Periscope session we hosted.
Negotiating With Creditors When Things Arent Going Wrong
Even when youre not having trouble keeping up with bills, you can still benefit from credit card debt negotiation. There are benefits that you can negotiate when things are fine with your account. These can help you avoid fees and save money by minimizing interest.
Here are some good reasons to call your credit card companies when your account is in good standing:
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Is There A Debt Settlement Repayment Calculator
Are you wondering if theres such a thing as a debt settlement repayment calculator? Many people ask this because they want to know how much they would have to pay to settle their debts. While some advertising might make it sound like up to 80% of your debt could be forgiven, or written off, that is unfortunately the exception and not the rule. Debt settlement arrangements are specific to someones individual circumstances, and creditors expect someone to pay as much as they can.
How To Avoid Being Sued By A Creditor
Your risk of being sued by a creditor increases after the six-month mark of nonpayment. Thats when many creditors charge off an account, meaning, they write off a debt as uncollectible and report it as a charge-off to the credit bureaus. However, youll still be expected to pay it. The six-month mark is often also the point when your creditor might typically hand your debt off to a third-party collection agency or sell it to a debt buyer.
To avoid a lawsuit, try to settle your debts before a charge-off occurs. Call the creditor or the debt collector and see if you can negotiate a settlement. If you have more than one debt, try to target one or two accounts to settle first, prioritizing those that are most likely to sue you.
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What If I Cant Make My Credit Card Payments
Did you know that only 25% of Canadians pay off their credit card debt in full each month?
That means 75% of us carry a balance on our credit cards each month. In fact, its quite common for Canadians to carry outstanding balances each month on several credit cards, which can result in paying several thousand dollars each year in interest. Many Canadians eventually need credit card debt help.
Next Steps If You Want To Go Ahead With Debt Settlement
Do your research. The Federal Trade Commission helps protect consumers by trying to prevent unfair business practices in the marketplace. The FTC has useful information on debt settlement thats worth reading as you consider debt settlement options.
Pick a reputable debt settlement service provider. Before you enroll in any debt settlement program, the Consumer Financial Protection Bureau recommends contacting your state attorney general and local consumer protection agency to check whether there are any complaints on file. The state attorney generals office can also check if the company is required to be licensed and whether it meets your states requirements.
The Better Business Bureau has consumer reviews of businesses that could help you as you research a debt settlement service provider.
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