[herangel]

I had a discover card opened when I was a young adult with my father(about eight years ago). As of a 18 months ago he stop paying on it even though the charges were made by him. Now I'm trying to take a step towards business ventures and this and some other things are on my credit are present. I have the option to pay in full or settle in full. Which one is the best to do. (I am taking certain steps with my father as we speak.)

[RickJ]

It used to be that settlements were considered derogatory, but nowadays with the focus being on Score, this is not the case.

I say if they will settle, then settle. Once it's paid off it will affect your score no differently than if you paid it in full.

This I was told by my contact person with the Credit Bureau.

[Northwind_Dagas]

If you settle versus pay in full, it will show on your credit report as "settled for less than the full amount." I don't know what impact this has on your score, but I don't think people looking at your report would find it favorable.

[herangel]

It used to be that settlements were considered derogatory, but nowadays with the focus being on Score, this is not the case.

I say if they will settle, then settle. Once it's paid off it will affect your score no differently than if you paid it in full.

This I was told by my contact person with the Credit Bureau.

Thank you I will settle, the damage is already done. The sooner I get it taken care of the more quick the time will start for it to come off my report.

[aqua@home]

I was told that when you settle it is much worse than if it were to say paid in full on your credit.

[DrJ]

It used to be that way... but not anymore. Its really not a big deal anymore. Creditors settle debts all the time nowadays. Besides, she's already 18 months delinquent... it isn't going to make a difference at all.

[aqua@home]

You are probably right. I think the only difference comes when you are trying to rebuild your credit. With these things on the credit report it would be beneficial for it to say paid in full vs. settled. That's all I was saying. But if that's not how it works then great. Guess I shouldn't say unless I know for sure. My apologies, herangel.

[DrJ]

Well, its definitely better to say paid in full than paid as settled... but it is no longer a factor when determining your score. That's all. If a lender looks at the details of each account, they could see that the account was settled and make a personal judgment about it though. However, I wouldn't think it would ever cost someone a loan... at least it was satisfied. A settlement is still an agreement between the creditor and debtor.

[hardwired]

I would pay the full amount due. If you settle for less it will show up as a balance that is delinquent. You want zero balance and paid in full to show up.

As part of paying the balance in full, explain the situation that you did not make the charges and want to pay the balance and close the account in good standing, and ask that they correct any derogatory information or lates and satisfactory paid in full with the 3 credit agencies. Take names and ask for it in writing so you can dispute later on if necessary.

[DrJ]

Not sure where you're getting your information from, hardwire... but if you settle an account, the remaining difference will NOT show up as a deficiency balance (or a balance that is delinquent) and you will not be held liable for that remaining amount.

[hardwired]

There were two accounts that I settled on some years back and did not pay the full balance owed after the account went to collections. The balance showed $1 on one of the accounts and a couple hundred (the difference of the settlement) on the other.

The collectors (paid by commission) will tell you if you settle your CR will be good but in actuality the chargeoff derogatory will stay on your CR and you will not have a zero balance. Demand you get it in writing that they will remove any and all deragotory notations pertaining to the account from all of the credit reporting agency files.

When you go for a mortgage or other large financing you will have to explain in writing all of the deragotory crud on your credit report. I want all my debts showed as paid including my early mistakes.

[K_3]

If they settle they have to show zero balance on your credit report. You really need to follow up to make sure they do. Have the settlement amount in writing and keep notes as to who the person is you spoke with each time. Discover told a client of mine you have to pay taxes on the difference. I do not know that for a fact. It might have just been Discover card pushing him to pay the balance.

[DrJ]

Reality and what is reflected on your credit report may be two different things. Also, as stated, if the deal was not clearing stated in writing, you may have just gotten screwed.

First, never take a collectors (or creditors) word. ALWAYS get it in writing. ALWAYS! If you get your settlement offer in writing, you will not legally be held responsible for the remaining debt.

Also, settling an account doesn't mean that derogatory marks will be removed as well. When negotiating your debt, try to make it part of the deal. If they do not agree to remove all derogatory information from the account in question, ask if they will ignore any future requests from the credit agencies regarding the account. If they agree to this, one letter to the credit agencies disputing the derogatory information will result in them being removed. (This is because the agencies will contact the creditor/collector to verify the derogatory marks... since they agreed to ignore that request, the agenciy must oblige the dispute).

Always have everything in writing... that way, if a balance does end up on your credit report, you can send in the agreement along with proof of timely payment and have the matter resolved.

[dlc]

A settlement is nearly as bad as a bankruptcy. --it is like a mini bankruptcy. It will stay on your credit report for 7 years. Paying in full is definitely better than a settlement.

Yes, you do have to pay tax on any amount of cancelled debt. They will issue a 1099C for the amount charged off and if you do not include it on your tax return, the IRS will send you a bill later and report it to your state tax agency.

[DrJ]

For the benfit of the general public, the above post is NOT at all accurate.

A settlement and a bankruptcy are two ENTIRELY different things. They are nothing like each other.

A settlement, like ANYTHING that is reported on your credit report MAY stay on for up to 7 years or even longer. However, these things are quite easy to remove much sooner, as well.

Paying in full better than a settlement? Well, that depends.

If you had a home and a car that are going to last you another two years at least.. but you had $50,000 in credit card debt that you could settle for $20-25,000. Would you do it? What if you had an 800 credit score? What if you had a 500 credit score? How much if your credit for the next year worth to you? Over $25,000??

[dlc]

For the benefit of the general public.

My post was accurate. A debt settlement is a pretty heavy hit to your credit report. It is my own words to liken it to a mini bankruptcy. A bankruptcy is settling out all your debts for less than owed. A debt settlement is settling out ONE debt for less than owed. Hence, "like" a mini bankruptcy.

Yes, they are two entirely different things. But when talking about credit score, a debt settlement is looked upon as seriously as a bankruptcy.
35% of your credit score rests upon your payment history. If you do not make your payments your score takes a heavy hit. If you settle--you are not paying your debt, hence a heavy hit.

You cannot "easily" remove a settlement. Yes, you can ask a creditor to not report it, but why would they? You don't pay your bills in full. They will often settle for less because something is better than nothing. You can ask the creditor to remove it--but again, why would they.
The credit reporting agency will not remove it because you ask them to.
It will remain for 7 years and if not removed then, you may ask it to be removed and it will.

Even if you pay in full later, it will not be removed simply because you paid it later. Your report will reflect it was paid and paid in full, but at a later date.

I am not saying to settle or not to settle. Sometimes it works out to settle and may be the best in a given situation.

In general, it is ALWAYS better to pay your bills than to not pay them. As relates to your credit score, it is always better to pay in full than settle.
It is always better to pay your bills. But sometimes it simply cannot be done.
The question was which is better. Paying in full is better.

I'm sorry, I'm new to this board. I was doing some research and was attracted by the advertised "experts" that were here to give advice.
I have not as yet introduced myself or listed my credentials.
For the public information: 30 years in finance, IRS training, certified by the Consumer Data Industry Association for Fair Credit Reporting Act Certification.

And, by the way, the exam covers this type of question.

One more note on bankruptcy vs debt settlement. In order to file bankruptcy, insolvency is a factor. With a debt settlement, insolvency is not necessarily a factor. Many people who are quite able to pay in full choose to settle. In other words, they get out of paying what they owe rather than they are unable to pay what they owe.

[DrJ]

Test or no test, I am living proof that one can settle a debt and remove any evidence of it on a credit report within a year. Its possible and its easy if you know what you are doing.

Another big leg of your credit report is your usability: the percentage of how much of your max credit you are using. Another big leg is your debt-to-income ratio.

I give about 30% to each of these legs (including the one you mentioned) and the remaining 10% is spread out over length of credit, type of credit, etc... some smaller factors.

So if I am maxed out on all my cards at say 55% DTI (debt-to-income ratio) my credit is already bad... who cares about payment history?? If I have to take a *TEMPORARY* hit on 30% of my credit in order to fix 60% of my credit, why not? Especially when I can go back and fix that 30% up some afterward.


Here's a test question for ya:

Person A is maxed out on all his cards. He makes $2000/mo and pays $1100 in credit cards alone. BUT he has NEVER missed a payment in his life.

Person B has no debt and makes $2000/mo but he has missed payments in the past and even settled an account or two.

Who would YOU want to lend to? What good is person A's credit to anyone? (Except the creditors who will decide to raise his interest rates to 35% because he is so maxed out)

[dlc]

Whatever. I don't have time to feed your ego.

The question was which is better.
General advice: It is always better to pay your debt than to not pay your debt.

Agreed--sometimes a settlement may be the best option in a given situation. Sometimes the best option is to severe a limb in order to live.

If your credit rating is at rock bottom, it doesn't much matter. If you have a pretty good credit rating it's a big hit.

But, the question was simply which is better and implied there was a choice.

It is not good to throw specific advice out without knowing the full financial picture. It is likewise not good to advise that everyone can do what you did once. It is very easy to give the advice when you cannot be held accountable for it. I give advice on a daily basis, I am well paid for that advice, and I am held accountable. My position remains the same.

Pay your debt--that is ALWAYS the best choice.

If you have no choices, you do the best you can. I do not however advise people to do what I have done, as that is not necessarily best for them. Specific advice must be made knowing the individual's full financial picture.

Everyone should be aware of what is used to determine Credit Scores.

Credit scores are composed of the following:
35% Payment history
30% Amounts owed
15% Length of Credit history
10% New Credit
10% Types of credit used.


Payment history includes late payments, debt settlements, leins, judgements, levys, garnishments, etc.
Amounts owed includes debt to income ratio and % or credit used (or debt to limit ratio)

Be aware, they also look at money movement. Eg Balance Transfers.

[dlc]

Here's a test question for ya:

Person A is maxed out on all his cards. He makes $2000/mo and pays $1100 in credit cards alone. BUT he has NEVER missed a payment in his life.

Person B has no debt and makes $2000/mo but he has missed payments in the past and even settled an account or two.

Who would YOU want to lend to? What good is person A's credit to anyone? (Except the creditors who will decide to raise his interest rates to 35% because he is so maxed out)


As a personal question, if I had to choose between the two, I would rather lend to person A because I know I will get paid back.
But, I would be leary of making that loan and would not want to loan to either party.

A creditor is not likely to lend to either one.

Additionally, the interest rate for both of them would be very high.

Now, had person B chosen to pay his debt in full, even if late, rather than taking the easy way out and paying only part of his debt, he would be a much better candidate for the loan. And probably at a lower interest rate, although still higher than the guy who pays on time.

What is the point to your question? People who pay their debts are better credit risks than those who don't. People who are maxed out can't get credit because they cannot pay it back.
The creditors do not make choices on a personal level anymore. The credit rating was devised to assess risk.
All things are considered. They do not pick and they don't get personal.

A settlement is not good. It is bad.

[DrJ]

I agree with you 100%. This is something I have said many times throughout this forum. I apologize for coming off strong. Too many times have I had to deal with someone here spewing out bad, false, or useless information misleading too many people.

I, too, am in a very similar field as you. My intent was just to set the record straight. If you will recall, my first answer to your post about which is bettwe was simply "it depends." it always depends on the situation.

However, implying certain things without further explanation is not a good idea. What you claim I have done once, I have actually done MANY times with MANY different people in MANY different situations.

The original question had nothing to do with general, overall adice. It is about a delinquent debt that isn't even his. His father stopped paying the account 18 months ago... the damage is already done! Why would you advise someone to throw away all that extra money just to ensure a "paid as full" on his report? There is simply no reason for that. There is no evidence showing that a "paid in full" would help his score in this case. Yet, I have case study after case study showing that it simply doesn't make a difference at all... aside from the poossible thousands of dollars he could be saving.