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When you have past due debts, you may be looking for ways to pay them off or to avoid legal action. Fully paying off collectors is an option, but you can also consider settling unpaid debts.
A debt settled simply means that a creditor has agreed to accept less than what is due as a final payment. There are companies that offer debt settlement or relief services, and it is also possible to settle a settlement with creditors yourself.
Should we settle for less or is it better to pay in full? Here are some of the most important things to consider when developing a debt management strategy.
Is it better to pay in full or settle the credit scores?
Your credit scores are important because they determine how easily you can get approved for new lines of credit. They also influence the interest rates you pay and the total cost of your borrowing.
When it comes to how settling debt versus paying it off affects credit scores, there is a difference. Generally speaking, having a debt listed as paid in full on your credit reports sends a more positive signal to lenders than having one or more debts listed as paid. Payment history represents 35% of your FICO credit score, so the fewer negative scores you have, such as late payments or paid debts, the better.
One thing to keep in mind is that creditors may not be willing to discuss debt settlement until an account is overdue. So you may need a 90 to 180 day delay on your payments before a creditor is ready to pay less instead of paying off the debt altogether. If the creditor reports these late payments to the credit bureaus, then these late payments have already caused damage.
Late payments can linger on your credit reports for up to seven years, although the impact on your scores wears off over time. A settled debt status could add to the negative impact, at least in the short term until those accounts age on your credit reports.
Also note that paying in full from a collection account may or may not improve your credit score. This is because different FICO credit scoring models treat collection accounts differently, depending on whether they are paid or not.
Older versions of FICO released before FICO 8, for example, treat all collection accounts as a negative item. FICOs 8, 9 and 10 ignore collection balances less than $ 100 and all collection accounts paid in full. Unpaid medical collections are still factored into your score with these FICO versions, but they have less impact on FICO 9 and FICO 10 calculations.
Can You Pay To Remove Bad Debt From Credit Reports?
As you explore your past due debt settlement options, you may come across references to something called pay to delete or pay to delete. This tactic involves paying creditors or collection agencies to remove negative information from your credit reports.
This usually involves writing a salary waiver letter to the creditor or debt collector, outlining your risk. If the creditor agrees, you would pay the fees they request and, theoretically, the negative information would be removed from your credit reports.
There is only one problem with writing a salary waiver letter. When negative information, including settled debts or collection accounts, is right, only time can remove it. Paying to delete is not an option and it can even be considered illegal. Again, accurate negative information can stay on your credit reports for up to seven years. So whether you are paying in full or negotiating a debt settlement, either on your own or by hiring a debt settlement company, there is no way to remove the negative marks associated with these accounts.
How to pay off credit card debt
If you think debt settlement is the best option for your situation, debt settlement yourself can save you money. This is because debt relief or debt settlement companies can charge high fees for their services.
Plus, whether you go the DIY route or use a debt settlement company, you may have to pay income tax. If you reach a settlement and at least $ 600 of debt is written off, you will likely have to pay income tax on the amount canceled.
Learning to negotiate credit card debt on your own simply means knowing how to get the right deal with your creditors. There is no rule of thumb for what to offer as a debt settlement. Some creditors may refuse less than 75% or 85% of the balance owed, while others may be willing to accept 50% of what is owed or even less.
When deciding how much to offer for a debt settlement, consider the following:
- How much is owed on the debt
- When was the last payment made and how much can the debt be written off
- How much you can realistically afford to pay for a settlement
This last part is important because debt settlement usually requires you to make a lump sum payment. Some creditors may allow you to split it into two or three installments for larger debts. But that still means that you will need to have cash on hand to settle.
When you are ready to make an offer, you can contact your creditor by phone or in writing. Sticking to written communication, whether it’s certified mail or email, means you have a paper trail if the creditor later disputes the terms of the settlement. Be prepared for your creditor to make a counteroffer, but don’t be rushed into accepting an amount you can’t afford or think is reasonable.
Once you and the creditor have reached an agreement, get the final details in writing before sending payment. Your creditor may request a wire transfer, check, or ACH payment. Once payment has been sent, get written verification from the creditor that it has been received and applied to your account. The last step is to check your credit reports to make sure the account has been correctly marked as settled and closed on your credit reports.
What to do if you want to pay off your debts instead
If you’d rather avoid a debt settlement, think about your options for paying off what you owe. For example, you can try a structured debt repayment, which means that you and the creditor agree to specific terms on how much you will pay each month. Your creditor may be willing to offer a restructured repayment plan if you have experienced financial hardship or have shown that you are committed to paying back what is owed to you.
You can also look for options to make your debt less expensive. If you have high interest rate credit card debt, for example, transferring it to a 0% APR balance transfer card could save you money. Just keep in mind that you will need to pay off the balance in full before the promotional period ends and before the Regular Variable APR begins to avoid interest charges. And you can also pay a balance transfer fee, depending on which card you choose.
Another option is a debt consolidation loan. Debt consolidation loans allow you to pay off multiple debts and then make a single payment for the loan in the future. A debt consolidation loan or personal loan can be useful for paying off debt if you need to borrow more money and can qualify for a lower interest rate.
You can also use a home equity loan to pay off your debts, although there is a caveat. Home equity loans and Home Equity Lines of Credit (HELOCs) use your home as collateral. If you default on the Home Equity Loan or HELOC, you could risk losing your home to foreclosure.
When to get help with your debt
If you’re overwhelmed by the idea of ââtrying to pay off your debt or negotiating credit card debt settlement on your own, talking to a credit counselor can help. Nonprofit credit counseling agencies offer a number of services, including helping consumers find the right strategy for paying off debt.
A credit counselor or debt counselor can review your debts, income, and expenses to help you create a realistic budget. They can also discuss the different debt repayment options, including whether a Debt Management Plan (DMP) might be right for you. This debt repayment strategy involves making a payment to the credit counselor, who then allocates the payment among your creditors.
Debt management plans can save you money if your credit counselor is able to negotiate interest rate reductions or fee waivers on your behalf. Even if you end up choosing a different solution, credit counseling services can help you weigh all your options and get your debt under control.
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When you find yourself with a heavy debt burden, determining whether to pay it off or settle it is an important decision. Being overwhelmed with debt can make you feel like your options are limited; in fact, you have a full range of options, from debt consolidation and debt management to debt settlement, plus resources that can help, including debt counselors. By carefully considering your debt and your available options, the best choice will become clearer.