delinquent credit card: pay or settle?

July 18, 2018 8:52 AM

Followup to an earlier question. I was unemployed for a while, and let one of my credit cards go unpaid too long. It went to collections... I think? Now I may be able to settle for about 40% of the debt, but should I? How do I decide?

I asked the previous question in May: credit card with about $21K balance, Citibank closed the account and referred it to an outfit called Client Services. In June, Client Services offered to settle the debt for a lump sum of about $8500, but I didn't have any money, so I didn't accept the settlement. BUT - after a few months pause, Citibank has resumed sending monthly bills as if nothing had happened. So it doesn't seem like Citi has actually written the debt off yet.

If I paid the minimum payment of $5500 to Citi (that's about $500 as monthly minimum and $5000 in fees and delinquent monthly minimums), I'd be back on the old track, paying a minimum $500 a month for a decade or two until it's paid off.

Now I have a job again. I could probably afford to pay the Citi minimum of $5500 now and pay off the rest in installments. Or, if I borrowed some money from other sources or waited a few months, I might be able to pay Client Services' settlement offer - if it's still open.

Assuming I could still get a settlement, let's say $10K or less, which is better for my credit rating: pay the settlement and get a $10K writeoff on my record (and have to pay taxes on that), or get back on the $20K grind, pay it all slowly, and get my account back in relatively good standing? I have no plans to apply for new credit, loans, mortgages, or car leases in the next few years, but I might have to rent a new apartment, so I may need a good score.

Paying the settlement would be a greater hardship right now (larger lump sum plus tax implications) but if it's not any worse for my credit, it might be worth it. If Citi had already written off the debt, then the credit blemish would already be there, but that doesn't seem to be the case.

Data: my current credit score is 520 (weirdly, it was more like 480 last week). It was around 680 a year ago (high credit utilization but no delinquencies) when I started having financial troubles.

My credit report as of yesterday shows this status for the Citibank card:

Last payment made: 12/2017
Pay status: Account 120 Days Past Due Date
Terms: $2500 per month; paid monthly
Date closed: 05/2018
Maximum delinquency of 120 days in 06/2018 for $2500 and in 07/2018 for $3000
Credit limit of $19,400 from 01/2016 to 07/2018
Estimated month and year that this item will be removed: 01/2025
The last 5 months are rated 120 120 90 60 30, and then OK for all previous months.

All my other accounts on the credit report are solid OK, except for a second credit card with about $16K balance that is OK 60 30 OK OK .....

If my landlord has reported me for being late on rent, it hasn't shown up on my credit report. I never let anything else get significantly late.

posted by anonymous to Work & Money (4 answers total)

Small time "mom and pop" landlord here. It sounds like the only reason you really need good credit would be to get an apartment. My advice on credit from a non-professional landlord's point of view is that, if you need to rent somewhere, you want to either have good credit or a good landlord reference, and the latter is more important. I'm willing to overlook some credit issues if someone's landlord says that they stayed current. If you can do relationship damage control with your landlord related to your late payments, then taking the credit hit in order to save tens of thousands of dollars makes a lot of sense. (It probably does either way, frankly.) If you don't need to move right away, giving all of this some time to fade a bit would be ideal. The more contained the credit problems, (in time, in terms of the number of accounts that got delinquencies), the more you can explain it as an isolated issue. If your report is clean from here on out, you could tell a landlord like me, "I ended up unemployed when I was younger, so you'll see some credit problems in March of 2017. I was also late on my rent in March, then I paid that, but then I was late again in April. But I got caught up on rent and late fees by May and wasn't late again. That taught me a lot about money management for emergencies, and I now have a savings account with enough that I feel confident that it won't ever happen again."
posted by slidell at 9:32 AM on July 18, 2018

You should already know how long the offer is open for, because you should have it in writing. No?

Is there a notation in the public records section of your credit report about referral to collections?

FICO is something of a black box, but a "paid settled" on your report generally has a negative impact on your credit rating. Catching up back to "pays as agreed" is considerably better. Settling would presumably reduce your credit utilization, but I don't think that would offset the effect of a "paid settled." Paying Citibank now would reset the statute of limitations on your debt, but it's only been a few months since you breached, so that's not a big deal. I would act soon if I were you. It sounds like Citibank recalled the account from Client Services because they weren't succeeding in collecting. The next step might be referral out to another, worse company for litigation.

Rent does not generally appear on credit reports.
posted by praemunire at 9:59 AM on July 18, 2018 [2 favorites]

Green path offers free professional counseling in exactly this area and is often recommended here.

I am also a landlord on the side and I weigh your ability to pay much more heavily than your credit score. I would look at your paychecks much more closely than your overall credit score - if you have a high credit score but the math just doesn't work out for you to be able to pay rent from what you actually bring home every month, it doesn't do me much good; if it's the opposite, you are likely to keep current on rent regardless of what happened with other types of debt in the past. From what I understand, credit score is important for luxury housing but it doesn't sound like that's you.
posted by rada at 10:36 AM on July 18, 2018 [1 favorite]

I think you should take a serious look at bankruptcy. You've got 35K in credit card debt. One thing you're not including is the APR on your credit cards and how much you'll pay in interest over the next N years paying back the principal. Assuming you have something like a 29% penalty APR and you think you can pay the first credit card back within 5 years, you'll still pay almost 19000 dollars just in interest. That's ignoring the other one with 16K on it.

520 is a pretty low score and with the delinquencies you have I think it's going to take at least a few years to get your score back up to the mid-600s.
posted by Fidel Cashflow at 11:14 AM on July 18, 2018