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I have credit card debt of $4,000 and I just received an option to pay the balance in full or take a $600 settlement offer. My credit is not great and I don't own a home. Should I take the settlement offer and work on building my credit over? How long will it take to increase my credit score over time?
An offer of $600 for a $4,000 debt is tempting. As you suggest in your question, it may come at a price. Your credit report will, under normal circumstances, reflect the settlement for the next seven years. This will damage your FICO score, and make it difficult for you to lease a car, rent an apartment, or buy a house in the near future. If you can work out a payment plan to pay off the entire debt, that would create the least amount of damage to your credit score.
If your credit score is already low, then this settlement may not cause additional damage.
Let me give you a little information on how your score is calculated.
The most important step in understanding your credit score is to know what a credit score is and how it is determined. A FICO credit score comes from the Fair Isaac Company. Three quarters of all lenders use the FICO credit score when considering requests for loans or credit which is why this is an integral part of understanding your credit score.
I would like to add-
Given below is a rough formula used to calculate your score:
~ 35% on your payment history
~ 30% on the amount you currently owe lenders
~ 15% on the length of your credit history
~ 10% on the number of new credit accounts you've opened or applied for (fewer is better)
~ 10% on the mix of credit accounts you have
The best way to improve your credit score is to pay your bills on time and manage your credit wisely. The most important item is your mortgage. Make sure you pay it on time every month in order to maintain a good credit score. Installment loans, where you borrow a set amount to buy new furniture or appliances, for example, are given more weight than credit cards.
Keep your spends well below your credit limits, because your FICO credit score will definitely be lower if you are maxed out on your credit cards. Don't have more than two or three credit cards because a large number of credit cards also lowers your FICO score. Don't apply for several credit cards at one time; it makes lenders nervous and will lower your FICO score. Other factors also affect your score, such as home ownership, which raises it, and moving frequently, which lowers it.
First, has your debt been sold to an Collection Agency (CA) or still is with the Original Creditor (OC)? Very important to know this.
If it has been sold already, you no longer negotiate with the OC but with the CA. Very important to negotiate a PFD with the settlement. You do not want to have a "paid" collection account in your credit report. ANY collection account in your credit report is BAD... no matter if it's "Paid in full" or "Settle for less".
Hi Dolly,
I think you can take the settlement offer, if you are unable to pay the entire balance. However, before doing that, check your credit report thoroughly so that you know whether you have to deal with the CA or the OC. After that, send a pay for delete letter to the creditor or the collector asking them to remove the negative listing from your credit report. This will help you in improving your score. In future concentrate on paying the bills regularly and establish a good payment history.