Credit card charge off: pay in full or accept settlement?

August 3, 2009 12:11 AM

Credit card charge off: pay in full or accept settlement offer?

My 23 year old sister racked up some credit card debt during a low point in her life a few years ago and is now looking to tackle it and get her credit back on track. I am in a position where I can help her financially and would like to help her make the best decisions.

All of her credit card debt (~$7000) is charged off and sold to debt collection agencies. The agencies are offering settlement deals for a little less than 50% of the original amount owed.

1. I'm assuming that "charged off - paid in full" looks better than "charged off - paid a settlement" on a credit report. Is that right? Is it a significant difference or should we save the money?

2. How would these options actually be listed on her credit report?

3. If she does settle, can she ask that they remove the information from her credit report as a condition of settling?

4. If she pays in full, can she have the charge off removed from her credit report?

5. If I add her as an authorized user to some of my credit cards, will it raise her credit score? Will it lower mine?


NB. She talked to a credit counselor about a year ago, but couldn't afford the minimum due so they couldn't work with her. If you can personally recommend any counselors in the SF Bay area, I would appreciate it.

posted by Nickel to Work & Money (5 answers total)

Best answer: Save the cash and take the settlement, but get an agreement in writing that says the debt is satisfied, that the remainder is forgiven, and that the remainder won't be "sold" to another collection agencies. Some CAs will "forgive" part of the debt by agreeing that they will not try to further collect on it but, implicitly, they reserve the ability to sell that debt to another bottom-feeder CA who will aggressively collect.

Paying in full to have the item removed is called Pay For Delete and might work if you can get the debt pulled back to the original creditor or the debt is old. It's rare, especially since the credit reporting agencies look down on it strongly, but these days can work a lot better, especially if you aren't looking to get any fees or interest knocked off.

If she settles, the account will be shown as: Account Closed/Current/Was 150+ days past due/Charged Off (or Collections or Written Off)/Legally paid in full for less than full balance or something similar.

Adding her as an authorized user to some of your cards may work. Under the FICO 08 model it would not work, but Fair Isaac put the AU score bump back into the 09 revision, albeit with some extra (confidential, of course) controls to prevent "score inflation." Do note that this means she can rack up debt that's now in both of your names.
posted by fireoyster at 1:10 AM on August 3, 2009 [1 favorite]

Best answer: I imagine the first question is : Should she pay the collections agency anything?

A quick google search suggests "No" :

A "settlement" may just mean they stop harassing her, but sell off the remaining $3500, so another debt collector gets their shot, now more confident that she'll pay up eventually. So she ends up with three+ organizations bitching on her credit report, not just two. It looks like collections agencies will often sell off fully paid debts too, btw. I even see stories about debt collectors selling bank account information to identity thieves, just avoid them if possible.

I think she might get some traction by paying off the original creditor if they just "assigned" the debt to a collector, but still own it themselves. If they clean up their line on her credit report, then all the sleaze bag no-name collections agencies won't matter nearly so much. But they won't help her if they get the money via collections.

A few useful links :

http://www.credit.com/products/debt/Collections-Crash-Course.jsp
http://www.cardreport.com/credit-problems/collection-faq.html
posted by jeffburdges at 6:21 AM on August 3, 2009 [5 favorites]

Might be worth a try: calling the original credit card company (not the debt collector) and seeing if you can pay in full to them. Then it might be treated on the credit report not as charged off but as paid in full.
posted by raf at 6:34 AM on August 3, 2009

I went through the same thing with my wife recently, and we took the settlement and then started to build up her credit separately.

If her credit is bad enough that she's not able to get any credit card, you can get her a secured credit card (basically the bank holds her credit limit in cash in some account, usually a CD that earns some interest). What we did with our bank is to get a secured loan AND secured credit card, and then set up and automatic payment plan to pay back the loan over 18 months, in addition to paying back the credit card every month on time. These two lines of credit over a couple years will help a credit score a lot until the 7 years pass.
posted by kryptonik at 10:16 AM on August 3, 2009

Best answer: There is no difference between paying in full and having an unpaid debt. In fact paying at this point may lead to a refresh of the trend line and negatively affect her credit. I recommend seeing if you can pay them for a delete. First, send all of these collection companies debt verifications to see if they can even verify the information that suggests she owe the money. If they can't you don't pay them and it comes right off. If they do offer to pay for a delete in full or a settlement amount to be considered as payment in full for the debt. Also I should say make sure you can pay them in full before you start contacting them.

See here for more details
posted by Rubbstone at 11:22 AM on August 3, 2009 [2 favorites]