Is credit card settlement worth the hit to my credit score?
December 30, 2009 12:28 PM Subscribe
Is credit card settlement worth the hit to my credit score?
I have about $15,000 in credit card debt at rates approaching 30%. I know that I can settle at least part and possibly all of that debt by paying 70% of it immediately to the credit card companies with money from a lower-interest loan (15%) from another source. In essence, I'd be saving $4500 immediately, plus the savings resulting from the difference in interest rates. I realize that I will be taxed on that savings as if it were income and I also realize that settling can (will) hurt my credit score.
What I don't know is how to quantify the cost of my credit score being hurt. Is it worth $4500 + interest to keep my credit score up or is it better to (metaphorically) take the money? I own (mortgage) my house and don't plan to be buying another for at least another 4-5 years. I will need some sort of car in December. Otherwise, I'm not sure what I would need good credit for.
Can anyone place a monetary value on the difference in credit score if I do this and if I don't? And how long will it take my credit to recover?
Thanks!
I have about $15,000 in credit card debt at rates approaching 30%. I know that I can settle at least part and possibly all of that debt by paying 70% of it immediately to the credit card companies with money from a lower-interest loan (15%) from another source. In essence, I'd be saving $4500 immediately, plus the savings resulting from the difference in interest rates. I realize that I will be taxed on that savings as if it were income and I also realize that settling can (will) hurt my credit score.
What I don't know is how to quantify the cost of my credit score being hurt. Is it worth $4500 + interest to keep my credit score up or is it better to (metaphorically) take the money? I own (mortgage) my house and don't plan to be buying another for at least another 4-5 years. I will need some sort of car in December. Otherwise, I'm not sure what I would need good credit for.
Can anyone place a monetary value on the difference in credit score if I do this and if I don't? And how long will it take my credit to recover?
Thanks!
If you're "middle class" 15k @ 30% is going to take a long time to pay off.
IANAFP but I think it's in your best interest to lower your debt even if it means a ding to your credit. A lower interest rate, plus lower balance generally means a lower payment; if you throw every spare penny you have at crushing this new lower balance, you'll be debt free sooner which is more desirable to lenders than a higher balance but a better score.
There's also the psychological aspect of having your cards paid off.
posted by Scientifik at 1:26 PM on December 30, 2009
IANAFP but I think it's in your best interest to lower your debt even if it means a ding to your credit. A lower interest rate, plus lower balance generally means a lower payment; if you throw every spare penny you have at crushing this new lower balance, you'll be debt free sooner which is more desirable to lenders than a higher balance but a better score.
There's also the psychological aspect of having your cards paid off.
posted by Scientifik at 1:26 PM on December 30, 2009
Your credit score will recover over time. Unless you have quite a lot of money, I would think that saving $4500 would be worth more to you than a somewhat lower credit score.
posted by twblalock at 1:52 PM on December 30, 2009
posted by twblalock at 1:52 PM on December 30, 2009
I should add, by the way, that the reason credit card companies offer payoff deals at reduced amounts is because they believe, based on experience and statistics, that the people they offer those deals to would otherwise be unable to pay off their debts.
In other words, the credit card company does not think you can pay off your debt and is offering you a way out because it is better for them to get something rather than nothing. Given that they have lots of experience with this sort of thing, you should probably believe them when they predict you are in financial trouble.
posted by twblalock at 1:55 PM on December 30, 2009 [1 favorite]
In other words, the credit card company does not think you can pay off your debt and is offering you a way out because it is better for them to get something rather than nothing. Given that they have lots of experience with this sort of thing, you should probably believe them when they predict you are in financial trouble.
posted by twblalock at 1:55 PM on December 30, 2009 [1 favorite]
Don't forget that a write off means a tax hit as well!
I did a settlement a few years back with Discover, and they 1099'd me for the amount they wrote off! So bogus, especially because I was disabled and they wouldn't honor the disability program I had been paying on for a decade!!
posted by Jinx of the 2nd Law at 7:30 PM on December 30, 2009
I did a settlement a few years back with Discover, and they 1099'd me for the amount they wrote off! So bogus, especially because I was disabled and they wouldn't honor the disability program I had been paying on for a decade!!
posted by Jinx of the 2nd Law at 7:30 PM on December 30, 2009
(please forgive the slight derail here, but it was raised in the question and will save you a buttload of money which can be applied toward the debt paydown...)
The 1099 in question is 1099-C ("C" for debt "cancellation"). Keep in mind that cancelled debt is only taxable to the extent that the cancelled amount exceeds your overall insolvency. So if your net worth was in negative numbers before the cancellation and is still sub-zero immediately after, the forgiveness is not taxable. However, the IRS absolutely does not go out of its way to emphasize this fact to you and they have no way of knowing your net worth. So they assume everyone who gets a 1099-C owes them taxes on it, and leave it up to you to notice there's an exemption you can exercise. The form you want is 982 [PDF]. Cheers!
posted by nakedcodemonkey at 7:57 PM on December 30, 2009 [3 favorites]
The 1099 in question is 1099-C ("C" for debt "cancellation"). Keep in mind that cancelled debt is only taxable to the extent that the cancelled amount exceeds your overall insolvency. So if your net worth was in negative numbers before the cancellation and is still sub-zero immediately after, the forgiveness is not taxable. However, the IRS absolutely does not go out of its way to emphasize this fact to you and they have no way of knowing your net worth. So they assume everyone who gets a 1099-C owes them taxes on it, and leave it up to you to notice there's an exemption you can exercise. The form you want is 982 [PDF]. Cheers!
posted by nakedcodemonkey at 7:57 PM on December 30, 2009 [3 favorites]
credit card companies offer payoff deals at reduced amounts is because they believe, based on experience and statistics, that the people they offer those deals to would otherwise be unable to pay off their debts.
In normal times this would be true. These are not normal times, and lenders are shedding assets based on much looser criteria that normal, just to pare their business to a shape they want.
This doesn't change the numbers much, but I wouldn't extrapolate that the bank thinks callmejay is insolvent, just in a class of debtors that has a higher default rate at this point in history.
posted by dhartung at 2:05 PM on December 31, 2009
In normal times this would be true. These are not normal times, and lenders are shedding assets based on much looser criteria that normal, just to pare their business to a shape they want.
This doesn't change the numbers much, but I wouldn't extrapolate that the bank thinks callmejay is insolvent, just in a class of debtors that has a higher default rate at this point in history.
posted by dhartung at 2:05 PM on December 31, 2009
This thread is closed to new comments.
Second, unless this is going to completely destroy your credit to the point that no one will ever lend you money, the worst that happens is that you pay a few extra points on your next loan. You can ask a bank about this. I'd recommend asking them what the difference in terms would be should you try to get a car loan now v. a car loan with less debt and a lower credit score.
Other than that, people don't seem to realize that credit scores are mostly used to borrow money. If you don't plan on borrowing much, they're not something about which you need to worry all that much.
The main exception is insurance. Some underwriters use credit scores in their rate plans. Some states prohibit this. It might also be worth calling your various insurance companies to see if they use credit information in rating risks.
posted by valkyryn at 12:38 PM on December 30, 2009