They also influence the interest rates you pay and your total cost of borrowing. In terms of how settling debts versus paying them 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 settled. One thing to keep in mind is that creditors may not be willing to discuss debt settlement until an account is significantly past due. So, you may need to be 90 to days behind on your payments before a creditor may be willing to settle for less in lieu of charging off the debt altogether.
If the creditor is reporting those late payments to the credit bureaus, then those late payments have already done their damage. Late payments can linger on your credit reports for up to seven years, although their impact on your scores does fade over time. A settled debt status could add to the negative impact, at least in the near term until those accounts age on your credit reports.
Also, note that paying a collection account in full may or may not help your credit score. When exploring options for settling past due debts, you may come across references to something called pay to delete or pay for delete. This tactic involves paying creditors or collection agencies to remove negative information from your credit reports.
It usually involves writing a pay to delete letter to the creditor or debt collector, outlining your risk. When negative information, including settled debts or collection accounts, is accurate, only time can remove it.
Again, accurate negative information can stay on your credit reports for up to seven years. If you believe debt settlement is the best option for your situation, settling debts yourself can save you money. Also, whether you take the DIY route or use a debt settlement company, you may face an income tax liability. Learning how to negotiate credit card debt yourself simply means knowing how to strike the right bargain with your creditors.
That last part is important, as debt settlement usually requires you to make a lump sum payment. Some creditors may allow you to break it up into two or three payments in the case of larger debts.
Once you and the creditor have worked out an agreement, get the final details in writing before sending payment. Your creditor may ask for a wire transfer, check or ACH payment. The last step is following up by checking your credit reports to make sure the account has been properly marked as settled and closed on your credit reports.
You can also look into options for making your debt less expensive. 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. 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.
It's important to know that if the account was in collections , and you either paid it off or settled it, your credit score won't necessarily improve right away. How to Start Paying Off Debt You have many options to pay off debt that isn't already in collections. Start out by getting clear on how much you owe and how much you're paying in interest on each debt. If you have the money to pay extra on your accounts to reduce their balances, try paying down the debts with the highest interest rates first using the debt avalanche method ; you can also pay off the smallest debts first using the debt snowball method if that will help keep you motivated to pay off your debts.
If you'd prefer to simplify your debts and potentially reduce their interest rates, look into a debt consolidation loan , which lets you combine multiple accounts into one and make a single set monthly payment to pay them off.
A balance transfer credit card may also be an option if you qualify. Debt already in collections requires specific payoff strategies. First, contact the lender and explore your options for making a lump-sum payment to settle the debt or creating a payment plan to pay off the debt. If the creditor has sued you to get back the amount owed, it's a wise choice to hire a lawyer to help. A nonprofit credit counselor can also give you advice on the best way to handle a debt in collections, and on which payoff strategies make the most sense for your finances.
How to Get Extra Help With Debt Debt payoff can seem overwhelming and complicated, but there are many resources that can guide you. A good place to start is, again, a nonprofit credit counseling agency , where you can receive a free initial consultation and get help with budgeting and debt reduction strategies.
If you're not only dealing with debt collectors but you're also involved in a lawsuit related to your debt, a lawyer experienced with consumer debt issues is the best person to work with; you can find free local legal assistance through the Legal Services Corporation's search tool. If you're feeling burdened by debt and you're unable to pay for basic needs, call to connect with services in your area that may offer rent, mortgage, utility or medical bill assistance.
Other types of financial assistance may be available from the federal or state government, and you can take a look at the programs you qualify for at Benefits. Don't forget to engage with organizations that work with specific populations you might be a part of, such as Military OneSource , which serves military families and offers financial and legal resources.
Understanding Your Debt Payoff Options While it's best to pay off debt that's in collections rather than settling it, both options are far more beneficial than ignoring the debt completely.
You should give yourself credit for reaching the point at which you're ready to face your debt and get rid of it. While it may take time and effort, the promise of being debt-free is a meaningful, and realistic, goal to pursue.
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