Credit Card debt situation - please advise (pay, taxes, debts)

[roadrunner88]

Hello forum,

I have run into a financial situation that I would like to discuss with you, and potentially try to get some information from all the senior and experienced members here.

Now, here's my problem, I have had 4 credit cards in the past, lost my job in June of 2008, stopped making payments on my cards from Feb 09, and they all went into collections. They are Chase, Capital One, BankofAmerica and CitiBank. I got a copy of my latest credit report and found out that my score had fallen from a 708 back in Jan 09 to 555 as of today. Now, all the four have gone into collections and have been charged off, I received calls from the collectors offering settlement terms.

Finally I got a job 3 months back, and right now am trying to discharge my debt, I have stopped living on credit cards because I overdrew them last June, and ever since then been living on cash and debit card. Now, here are the payment amounts I owe each credit card company:

Bank of America - $500 (charged off, but I agreed to pay it in full, they said they would report to the credit bureaus as "paid in full")

Chase - I owe $2300 after a lot of ridiculous interests they put on it, I settled for $1650, now they said they would this as "settled in full" not "paid in full"

Capital one - I owe $2700 after ridiculous interests being charged on me, but they agreed to settle for $2100 and said that they would report it as "settled in full" not "paid in full"

Citibank - I owe them $4700 after the same ridiculous taxes, but they agreed to settle for $2500, of course they would report this as "settled in full" to the credit bureaus too

Now, my question is this, I plan to buy a car next year later say in Nov-Dec, and a house is on the cards 3-4 years from now, would it be better for me to pay off all the cards in full or settle them for the amounts agreed with the collection bureaus, would a "paid in full" on my credit file make a lot of difference to my credit score vs a "settled in full" considering that all the accounts are charged off anyway which itself is a negative thing.

Please advice me, I am quite confused as to what to do. I mean paying the full amount is a bit of a pain with the ridiculous interest rates, but if it's worth it in the long term, I would do that inspite of the hardships I have to face, else, if you think a settlement is good enough to get my credit score up at this point of time considering that the accounts have been charged off anyway, I would do that.

[sonarrat]

That's entirely up to you. The FICO model is pretty opaque, so it's going to be hard for any of us to say whether it's worth it or not to pay this much or that much. To help you make the decision, I'll lay on the table all your options. First, let's consider the makeup of a credit score, as Fair Isaac puts it in their own literature:

1. 35% payment history
2. 30% amounts owed
3. 15% length of credit history
4. 10% new credit (number of new accounts/requests)
5. 10% types of credit in use

So, let's consider your possibilities next.

1) You pay all accounts off in full for about $10,200, either right away or through a payment plan. The accounts will now show as paid and closed, and your amount owed will go down. You'll still have almost 2 years' worth of poor payment history which cannot be undone, but having the accounts show as paid and closed will remove four big black marks from the report and show that you made a good faith effort to make things right. If you can do it on payment plans, this also has the benefit of establishing a good recent payment history.

2) You settle the accounts. You still get the benefit of having the debt removed from your report, and it looks better than having the amount go to collections. However, it still can lower your score by as much as 125 points compared to before (according to Jeremy Simon), and you will have to report what they wrote off as income. However, it will be less than if you simply let them write everything off.

3. You blow it off and use the money you were going to pay the CC companies as a down payment on a car. The CC companies may review your credit periodically, realize you're making payments on another loan (indicating that you're making money again), and they'll sue you, which could result in attachments or garnishments. If you pay cash for a used car, though, and continue to operate on a cash-only basis for the next 5 years until everything falls off your report, then that's $10,200 you never had to pay. (You did have to pay taxes on it, though.)

[roadrunner88]

Sonarat, thank you very much for your reply.

No I don't intend to backtrack on the payment though, I am an honest person who went through an extraordinarily turbulent period which resulted in me not making my payments, but now I got a very good job, pay is good, I am able to get everything back on track. So, my options are:

1) I either pay off the full amount after which it would go down in my credit history as "paid in full" which is a huge positive of course.

2) I save around 3k right now and pay around 7k which would go down in my credit score as "settled in full".

The thing is that I wouldn't mind paying in full, but I have seen stuff online which says that since it's gone into collections anyway and has been charged off, I might as well settle it instead of paying it in full, of course I would have to pay taxes on the remaining amount, so I am unsure as to whether it really doesn't make any difference in settling or paying at this point of time because of the charge off. I would however, do one of those, I won't default on anything anymore.

[HappyTexan]

My sister got into CC troubles big time. She ended up declaring bankruptcy.
Yeah it hurt her but she learned her lesson and had a clean slate to start over.
She got one of those limited CC cards from the bank and used it wisely to get her credit back.
This was a few years ago and she was able to finance a car last year on a bit higher rate than a good borrower but she did get the loan. She told me her credit is coming back slowly each year as she monitors it.

Maybe bankruptcy is a better way out. Wipe the slate and start over knowing what you know now.

[chicagojlo]

Do the right thing and pay what you owe. You say you can afford it now, so be glad the bank didn't take you for every last penny when you were in your darkest hour and pay the fees they charged you instead. And hope that the good karma of doing the right thing pays off one day. I doubt you'd have much luck declaring bankruptcy if you say you can afford to pay it back anyway.

[VegasGrace]

Originally Posted by roadrunner88

Bank of America - $500 (charged off, but I agreed to pay it in full, they said they would report to the credit bureaus as "paid in full")

Chase - I owe $2300 after a lot of ridiculous interests they put on it, I settled for $1650, now they said they would this as "settled in full" not "paid in full"

Capital one - I owe $2700 after ridiculous interests being charged on me, but they agreed to settle for $2100 and said that they would report it as "settled in full" not "paid in full"

Citibank - I owe them $4700 after the same ridiculous taxes, but they agreed to settle for $2500, of course they would report this as "settled in full" to the credit bureaus too

Hate to be a downer but they are not doing you any favors. They are required by law to report that you've paid it. Settle/Paid - whatever. I don't think FICO will know the difference. Your payment history of 30/60/90 days late will still show for years to come. And you probably have at least two tradelines per account - 1 with the original creditor showing lates and a zero balance because they sold the account. Then the 2nd one being the collection agency showing lates and large balance.

So basically you are just paying old debt and want to know about auto and home loans.....

just having minimal balances will help...so yes, pay off everything you can-

my humble opinion

[roadrunner88]

Originally Posted by HappyTexan

My sister got into CC troubles big time. She ended up declaring bankruptcy.
Yeah it hurt her but she learned her lesson and had a clean slate to start over.
She got one of those limited CC cards from the bank and used it wisely to get her credit back.
This was a few years ago and she was able to finance a car last year on a bit higher rate than a good borrower but she did get the loan. She told me her credit is coming back slowly each year as she monitors it.

Maybe bankruptcy is a better way out. Wipe the slate and start over knowing what you know now.

Thank you for the advise, but I am not declaring bankruptcy or intend to, because I have the money now to pay off all my old debts, so that idea is pretty much non existent at this point of time.

I am only confused between whether to pay them completely with the ridiculous interest rates they charged, or to settle it as per my agreement with the collection agencies.

[roadrunner88]

Originally Posted by VegasGrace

Hate to be a downer but they are not doing you any favors. They are required by law to report that you've paid it. Settle/Paid - whatever. I don't think FICO will know the difference. Your payment history of 30/60/90 days late will still show for years to come. And you probably have at least two tradelines per account - 1 with the original creditor showing lates and a zero balance because they sold the account. Then the 2nd one being the collection agency showing lates and large balance.

So basically you are just paying old debt and want to know about auto and home loans.....

just having minimal balances will help...so yes, pay off everything you can-

my humble opinion

Thank you very much for the advise, so in essence, at this point of time, there's essentially no difference between a "settled in full" or a "paid in full". I thought that all the negative alerts put on my account of late payments, etc etc would be deleted if I paid in full, but that doesn't seem to be the case then, is it?

In that case, I might as well settle them and save myself around 4k instead of paying them in full. Also, I don't intend to take any auto loan right now, I was thinking after a couple of years or so, guess the best thing for me is to save up some money, may be around 10k, and buy a car with cash down, no issues there.

I have also decided to NEVER buy a house in US because of the current blood sucking policies of the banks, so yeah I probably wouldn't need a house in the near future either, I am actually thinking of going to some other place and working for a few years now looking at the depressing state of the economy, and the way our banks are looting us in broad daylight.

[sonarrat]

Actually, there is something else you need to know which is very important. I didn't know either until I started digging.

It's called "Pay to Delete." You can request your creditors IN WRITING (only!) to delete the offending account off the credit report as a term of repayment. This is perfectly legal, because all reporting to the credit bureaus is voluntary. No one is putting a gun to the bank's head and saying they must report your account just because you screwed up. So if you can work out a pay to delete, then it will help your credit a LOT more than having it show "paid in full." You may be able to do this even with a settlement rather than a full payment. It all depends on how sweet of a deal you can cut with them.

I mean, look at it this way. You've already got your credit ruined... If you're going to start paying again, there should be some kind of reward for doing the right thing and doing what you can. You can do it to feel like you're "doing the right thing," but these big soulless banks are simply not going to care, and neither is anyone else frankly. Credit is a business agreement, so treat it like one.

I will say one other thing.. if I was simply going to settle, and have the report show as "settled in full," rather than try to pay to delete, I wouldn't accept those ridiculously expensive offers. Written off old debt is typically sold on the open market for pennies on the dollar. Pay them accordingly.

[Zyngawf]

Another person looking for a way to get out of paying the money they borrowed and they owe. The banks probably weren't soulless and cruel when they loaned him all the money he wanted. Can't say I feel sorry for him in the slightest.