(Terrie from Ohio) I have 4 credit cards that I settled with this past year and I did a short sale on my house. I am trying to bring up my credit score. If I pay on the credit cards so they will say paid in full instead of settled on will this improve my score at all? I know the negative part will be on there for 7 years.
Terrie, the settlements that you completed on your credit cards certainly damaged your credit score, as did the short sale on your home. It may be important to note that the real damage to your score came from falling behind in payments on these accounts.
You may have lost well over 100 points from your credit score in the process of falling behind and possibly incurring charge-offs. Collection records further reduce your credit scores.
A settlement is a means for resolving a debt owed through a compromise. The lender agrees to forgive a portion of the debt in exchange for a lump sum payment that closes the account. Resolving a collection account through a settlement may cause a few points increase in your credit score, but the impact is very minor.
The primary benefit to settling on an account is not to improve your credit score. This benefit is minor. Instead, settling is a way to help avoid judgments and garnishments that can result from lenders that pursue their legal options. No one wants to have to go to court over a debt they owe, and they certainly want to avoid the public scrutiny and embarrassment that can result. A plaintiff that wins a judgment may also be able to attach wages (depending on state law), which can interfere with employment.
It is true that paying an account off in full will have a greater impact on your credit score than by settling. This can lower the cost of future credit accounts and save tremendous amounts of money on future credit purchases.
The question that you have to ask yourself is would you save more money through a settlement, or do you plan on making major credit purchases in the next few years that would require a better credit score? Keep in mind that having some debt forgiven through a settlement can increase your income tax liability, which may offset much of the savings.
Keep in mind that this information regarding debt settlement only holds true if you settle the accounts yourself. If you attempt to settle them through a debt settlement company, your experience will likely be much worse.
Tags: impact of settlement on credit score, pay in full or settle