What's Better? Paying Off or Making Settlement?

[ufojoe]

What is the name of your state? New York

Have a CC in collection for a few years now.

I called and negotiated a settlement amount with collection company. I have to pay it in two payments over two months time. That's if I accept it.

I'm thinking of paying of it all off over a year or two with payments on my own.

My question is this: Which is better for my ability to get a decent rate on loans in the future? Settlement? Or, pay in full to collection agency?

My friend, who works for a mortgage broker, ran a simulator for me:

He said:

I did the simulator... Paying off the credit card account in full will increase your score by about 13 points. Paying less than full amount was not an option but the lady says it is a "positive action", so the improvement would be somewhere between 1-12 points.

* * * * * *

So, it seems like settlement makes sense money-wise and points-wise (not much difference). But which is better for the long run and my future loan prospects? Either?

Plus, I have to take into account the taxes I'll have to pay on the unpaid money that will result in a settlement.

Thanks for any advice/help.

Joe

 

[Debt Guy]

Lets see if I can "migrate/emigrate" an answer your way.

This is a matter of opinion. The scoring mechanisms are proprietary and thus secret. So, no one know exactly what how they work.

In my opinion, the settlement will have less negative effect on your score over time. Scores are a combination of payment history, age (or recentcy) and the utilization (the ratio of the current balance to the total credit line) and a few other things (inquiries, types of credit, etc).

Right now, you have a negative item but it is old. The fact it is negative hurts the score but the fact it is old helps the score.

Any payment, a settlement in full or a payment plan, will change the "recentcy" of this negative item -- and thus reduce your score.

A settlement in full, will cause the balance due to be reported as zero and thus will change the utilization ratio of outstanding balance to the total line -- and thus increase your score.

I don't know if this is making sense to you. A payment plan will update the recentcy every month and thus keep this negative "more current" while improving the utilization only marginally month-by-month. A settlement changes two factors -- one positive and one negative. Maybe they offset -- I don't know -- but for sure as the item ages you will see more positive than negative in terms on impact on your score.

I cannot see any advantage in terms of your score to pay the balance in full.

This is why sometimes you see people say that paying an old collection is bad and ignoring it is good. Of course, getting sued is a major bad.

You can hit a home run if you can convice the collection agency to remove the negative item entirely. This does not happen very often but it is worth a shot.

I hope this all makes sense.

 

[ufojoe]

Thank you. Yes, it all made sense. If I knew I wasn't going to be sued, I might just igonore this. But morally, I feel obligated to do something. Just not sure what. But your info. helped a lot.

Thanks,

Joe