If you’ve accumulated a decent amount of credit card debt, you might be wondering what options you have for paying it off. Of course, you always have the option to pay off your balance in full, but you might also be wondering if debt settlement is worth it.
In some cases, you may be able to negotiate with your creditor to pay off less than you actually owe in exchange for a lump sum payment. While this may seem like the obvious route (who doesn’t want to save money?), you may find that debt settlement isn’t worth the time and effort, or the potential damage to your credit history.
Keep reading to get a better idea of whether it’s better to pay off your debt or pay it off.
What is better to repay or pay off the debt?
Here’s the good news: whether you choose to pay off your debt in full or pay off your debt, you will eventually be debt-free.
Which path you choose to take will depend on whether you want to prioritize saving money or protecting your credit history.
Settling your debt can hurt your credit history, but it can also save you money. It’s worth noting that settlement is usually only possible after the creditor writes off your debt as a loss, which happens when someone is badly overdue on debt. Ideally, you will always make your minimum debt payments on time.
If you’re looking to save money by seeking settlement, all hope is not lost on the credit score front. Settling and paying off your credit card debt will help lower your credit utilization rate, which will improve your credit score. Your credit utilization ratio shows how much of your available revolving credit you are using. When you pay off a form of revolving credit, such as a credit card or line of credit, you reduce the amount of credit you use and lower your credit utilization rate.
Ideally, you should keep your credit utilization rate below 30%, but the lower you can get it, the more you will see your credit score improve. Using your credit is the second most important factor in the FICO credit scoring model after making payments on time, so paying off revolving debt is a really effective way to boost your credit score.
Paying off your debt in full without a settlement will cost you more, but it is the quickest way to get out of your debt because settlement is not a quick process. And delaying debt repayment by waiting for a settlement offer can further damage your credit score.
Consider taxes and fees
It is important to be aware of the tax implications of paying off when you decide to pay off your debt in full or pay it off. You must pay taxes on the “forgiven” debt. If the forgiven amount is more than $600, you will receive a debt cancellation form 1099-C from the creditor or collection agency that you settled with.
The IRS requires you to report any amount of forgiveness for that tax year because it counts as income. When added to your taxable income, the money you just “saved” from the settlement may be worth more than estimated. In addition to taxes, you may also have to pay fees to pay off your debt. It is important to pay attention to these additional costs because as your savings decrease, the value of the settlement also decreases.
If settling is the only way you can afford to pay off your credit card debt, just make sure you have enough money set aside to pay those extra taxes.
Things to remember when moving in
Before you decide to pay off your debt, you need to consider its status—in particular, whether it is being reported as a write-off or being sent for collection.
When card debt is reported as a charge
One of the reasons why settling can negatively impact your credit score is that after the write-off debt is paid off, the lender will typically report the bill to the credit bureau as having been “settled for less than the full amount due.” ”
And just as the account sees the write-off as a pejorative event, it also sees the account being paid off in the same way, despite the fact that the debt has essentially been paid off.
When it comes to credit scoring, the time that has passed since a payment problem occurred can be one of the most important negative factors in a credit score. That is, a recent negative element can be expected to cause much more damage to points than an older one. This is why performance tends to improve over time after problems are resolved.
Thus, when a card goes from write-off report to settlement, even if the result is better, a later settlement date on the negative element may result in a lower score than it was before settlement, as part of the “time elapsed since last offense” calculation .
When the card debt is sent for collection
Whereas, a recent debt settlement can hurt your account when it replaces a write-off, as the last negative status, the worst, and the last move on this timeline is much easier.
Using the most widely used FICO models, once a bad debt has been sent to a collection agency, it will no longer matter to the valuation whether the debt is eventually paid in full or repaid. Unlike debt settled at the write-off stage, no change in accounting occurs when the charge goes from unpaid to fully paid or settled.
The date the debt was handed over to the collection agency is usually the only date that will be used to measure its age, regardless of the possible outcome.
bottom line
There are both pros and cons associated with settling or paying off your credit card debt in full. In making this decision, it is important to consider the true cost of settlement, including taxes and settlement company fees.
You should also be aware of the impact of debt resolution on the recovery of your account, especially when settling a pre-collection write-off. Take your time to carefully consider each option, and remember that whichever method you choose, paying off your credit card debt is something to celebrate.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
