What’s better: Paying off debt or settling it?

  • Save

Paying off debt in full is the best option if you want to avoid a negative mark on your credit report. Settling accounts can damage your credit report and lower your credit score. Settlements are not as bad as simply not paying on the account, but they will stay on your report for up to seven years from the original delinquency date of the account.

That’s the simplest answer to this question, but some debt situations require a more complex solution. Consumers often realize, after using a debt snowball calculator to try to figure out the best approach to paying down their debt, that they simply cannot make their payments on every debt account. Late payments shave points from your credit score, so another solution becomes necessary.

Dealing with debt settlement agencies

Debt settlement agencies are companies that will negotiate settlement offers with each of your creditors on your behalf. Unfortunately, they require that you stop making minimum monthly payments once you hire them. This allows accounts to go into delinquency, giving the settlement agency more leverage to negotiate a low payoff amount.

Many debt settlement agencies are nonprofit and will advertise that as a benefit to the consumer. That doesn’t mean they won’t charge you a fee. Debt settlement companies can be expensive, so any savings you get from paying a lower balance on outstanding accounts will be offset by their cost. You should still come out ahead, but not nearly as much as they claim.

The biggest drawback to debt settlement is the late payments you’ll register while waiting for them to begin the settlement process. Credit card companies won’t typically negotiate a settlement until you’re at least 90 days past due. That will register on your credit report and do significant damage to your credit score that could take several years to clean up.

Negotiating directly with credit card companies

An alternative to hiring a debt settlement agency is to simply negotiate with credit card companies directly. Calling the creditor and explaining your situation might result in reduced interest payments, a freeze on your account while you pay the balance down, or a combination of both. You might be able to avoid having to settle if you take this approach.

Keep in mind that late payments affect your credit score, so call your creditors before you reach that point. They want to keep you as a customer because they make money off your account. That’s a solid premise to begin negotiations. Let them know that you’d like to continue doing business with them, but you need help to keep the account current.

Applying for a debt consolidation loan

If you’re having trouble making minimum monthly payments on all your debt, and you’d prefer not to go the settlement route, consider applying for a debt consolidation loan. It’s a financial vehicle that you can use to combine all your outstanding credit card balances into one installment loan. This will lower your interest payments and help you pay off all your outstanding debts.

Debt consolidation is one of the better strategies for eliminating high-interest credit card debt. It will help you avoid settlement offers and make your debt more manageable. Once the loan is paid off, provided you don’t use your credit cards while doing it, you’ll be debt-free.

About the author

Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their nine wonderful grandchildren and two cats.

Sources:

https://www.experian.com/blogs/ask-experian/is-it-better-to-pay-off-bad-debt-or-to-settle-it/

Picture credit: Photo by Mikhail Nilov from Pexels

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.