Debt and Credit Score
CREDIT SCORE
A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit.
While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating a credit score:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
DELINQUENT ACCOUNTS
And if you have delinquent accounts, charge-offs, or collection accounts, take action to resolve them. If you have an account with multiple late or missed payments, for instance, get caught up on the past due amount, then work out a plan for making future payments on time. That won’t erase the late payments, but it can improve your payment history going forward.
If you have charge-offs or collection accounts, decide whether it makes sense to pay off those accounts in full or to offer the creditor a settlement. Newer FICO and VantageScore credit-scoring models assign less negative impact to paid collection accounts. Paying off collections or charge-offs might offer a modest score boost. Remember, negative account information can remain on your credit history for up to seven years—bankruptcies for 10.
OPTIONS
If you find yourself in financial trouble, know that you have several options to help you reduce your debts, the last and most drastic of which is bankruptcy. You should know that credit bureaus keep tab of all your credit, debt and payments, and although it is not possible to delete marks, you have options to help mitigate the effects of a credit gone bad.
Debt settlement, A debt settlement lets you settle your debt for less than what you owe
Debt consolidation, A debt consolidation loan is a loan you use to pay off debts
Debt Management Programs, an agent can negotiate new terms with your lenders that should result in lower interest rates and possibly dropped fess.
Bankruptcy, although it might be an option don’t take filing for bankruptcy lightly. Your credit score after bankruptcy will plummet. It should, however, be your last option. To negotiate a payment plan with a Collection agency, start out by getting clear on how much you owe and how much you’re paying in interest on each debt and draft your own payment play before your next contact with the agency.
Is Paying Off or Settling Debt Better for Your Credit?
In general, paying off the total amount of debt you owe is a better option for your credit.
An account that appears as “paid in full” on your credit report shows potential lenders that you have fulfilled your obligations as agreed, and that you paid the creditor the full amount due.
If you negotiate a settlement, and pay less than the full amount owed it will likely reduce debt burden it willhave modified the original credit agreementand hence once the payment is complete it will not have the same positive effect as a paid in full option.
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. The collection account will stay on your credit report for seven years, and older FICO® Score☉ models factor this notation into your score even if the balance on the account is zero.
Sources: