If you have the choice, pay off that big debt
Settling for less will save cash, but cripple your credit
Let's Talk Credit
Dear Let's Talk Credit,
I have about $30,000 in credit card debt. I was fortunate
enough to get a loan from my uncle to pay my debt off. My question: I'm not delinquent
with any of the cards, so would it be wise to try and negotiate a pay off
amount with the credit card companies? One of the credit card companies was
willing to take off a couple hundred dollars without considering it as a
settlement. But, I have two other credit card companies that say if I were to negotiate
a pay off amount less than what I owe, it would be considered a settlement,
which could potentially affect my credit. Is it really worth trying to settle
my account to save about $600 (I was told that if it was under $600, it would
not be reported to the IRS)? While I do want to pay off my debt, I want to see
if I can save some money. Please advise. -- Kaykeo
Saving money can be a motivator to us all. However, based on
your scenario, I don't believe it would be worth the damage to your credit. A
settled account could drop your FICO credit score anywhere from 45 to 125
points, depending on your score before the settlement. Your credit score is
evaluated by many different people including landlords, employers, insurance
companies and creditors. Therefore, I don't recommend purposefully taking an
action that would cause damage to your credit score.
Another thing to consider is that many card issuers will not
consider settling an account, if it is in good standing.
A better idea would be to thank your uncle for his generosity and pay off
your substantial credit card debt in full. Then, you should develop a plan to
pay back your uncle. Consider putting the loan agreement in writing and set a monthly payment amount, along with a monthly amount to
put into savings for emergencies.
To help with developing your spending plan, track your
expenses and decide where you might be able to cut back and also explore ways
you might increase your income. You may be surprised to learn that you are
spending a great deal each month on items that could easily be reduced or
Finally, check with your employer's human resources
department and determine if you are withholding the proper amount from your pay
check each pay period. If you are receiving a tax refund of more than a couple
of hundred dollars, you could increase your withholding and bring home more
money each month.
See related: After a windfall, do you negotiate or pay up?
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Published: June 6, 2013