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Advice About Debt Settlement

How will a reduced debt settlement show up on my credit report?

I got an offer to pay my debt on a credit card. They said they will take off 40% of the debt, and consider it Paid In Full. Is it better to go ahead and pay the lesser amount, and have a Paid In Full noted on my credit report? Or should I arrange to make payments on the full amount? I want to do which ever will improve my credit score the most. I don't know if it'd be best to pay in full at a lesser value, or establish a payment history until I pay the entire amount.

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Bill's Answer
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The answer to your question greatly depends on the amount of the debt in question, and how much money the settlement being offered will save you. If this is a $10,000 account, and settling the account will save you $4000 off the balance, I would encourage you to proceed with the settlement, as the small benefit you would receive on your credit rating is really not worth paying an extra $4000 to resolve the debt. However, if this is a $100 debt, meaning that the settlement will only save you $40, it would probably be worth it for you to go ahead and pay the full balance of the debt. If this account is already delinquent, which I assume it is, since the creditor is offering you a reduced balance settlement, the credit impact of resolving the account should be roughly the same regardless of whether you choose to settle the account or pay off the full balance.

Settling the account will likely result in an account status of “settled as agreed” or “settled for less than full balance” appearing on your credit report. These statuses are not generally as good as a “paid in full” status, but the difference is negligible, especially on an account that is already delinquent. The key thing that will help your credit report is resolving the delinquent debt so it will report a $0 balance on your credit report; how the account was resolved is not nearly as important, especially if the settlement will save you a significant amount of money.

If this account has reached a “charge off” status, you need to pay off this account as quickly as possible, as a charged off account appearing on your credit report can significantly lower your credit score. While setting up payments on the account may help you build a positive payment history on the account, a charge-off status will likely have a stronger negative influence than the payments would improve your score. If the account has not yet charged off, the creditor may be able to “re-age” the account, bringing the debt current and allowing you to continue making payments on the account. However, even if the creditor is willing to re-age the account and set up payments, you must consider that you will be paying interest on the account, probably at a very high interest rate, so paying off the account in this manner may cost you a lot more than settling the account now.

In my opinion, the best approach available in these circumstances is for you to settle this delinquent debt, and then open one or two new credit lines to begin building a positive payment history on your credit report. Use your new cards regularly, but make sure that you pay them off each month to avoid paying interest at the high rates charged by many credit card issuers. Taking these steps will provide you with the benefits and savings of a settlement while allowing you to continue building a positive credit history.

For more information about credit, credit reports, and credit scoring, I invite you to visit the Bills.com Credit Help page.

I wish you the best of luck in resolving this debt, and hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com

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19 Comments

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  • BA
    Feb, 2010
    Bill
    Paying it off won't remove the chareoff, but having it settled or paid in full will be better than an open account that has been charged off (or R9 status). I'm not sure of your financial situation, but if that is your only bad mark on your credit profile and you are concerned about your credit soore, then definitely pay it off.
    0 Votes

  • BA
    Feb, 2010
    Bill
    "Charge off" does not mean the debt is forgiven. From a legal perspective, charge off means almost nothing to the debtor. See Charge-Off & Credit Report to learn more about charge off and your options for resolving the debt.
    0 Votes

  • 35x35
    Feb, 2010
    toya
    I have a credit card that has been charged off. Should I offer to make payments on it so it would not mess my credit up or should I leave it alone it is around $550.00?
    0 Votes

  • BA
    Jan, 2010
    Bill
    Read my answer to a fellow reader who had a similar question in "Served Summons and Complaint." This article discusses your options.
    0 Votes

  • 35x35
    Jan, 2010
    parkar
    amex sued me in TX for$ 14000,my hearing is on MON> jan 18 2009,what should I do? How can I buy time?After judgement what happened?
    0 Votes