Is it possible to fix credit score without paying off debt?

[mattymo]

Hi, I have about $6000 worth of debt in collections due to extreme negligence and recklessness on my part a few years back. My credit score is low 400's as a result of this. I have the ability to pay off this debt by settling for about half by the end of summer, but I feel I could make better use of that money in the mean time than to pay off the debt. Question is, is there any way my credit score will get out of the hole without paying off this debt? My friend said it would look much better to have a car loan paid off; method: save up money for a car, then finance the car with a high-rate auto loan, and pay it off within a month, assuming there are no early payoff fees. Thanks.

[bjl584]

I would think that that $6000 debt is going to be on your credit report until you settle it. I would focus on paying off the dent before doing anything else.

Someone else posted a question recently whereby they wanted to buy a car and pay it off quickly just to raise their credit score. I don't think that this is a good strategy. First of, do you need a new car? If not, then buying one just to raise your credit score doesn't make sense.

Pay off your debt obligations then start to rebuild your credit through more sensible means. An example may be to apply for a CC with a low limit (say $1000) and charge a few items on it. Then, pay off the bill IN FULL evary month. Your credit score will fix itself without having to take on more debt in the form of an auto loan.

[disneysteve]

Your friend is wrong if his advice consists of borrowing even more money when you have 6K in bad debt out there already. Pay off your existing debt. That and time will heal your credit.

[jpg7n16]

Hi, I have about $6000 worth of debt in collections due to extreme negligence and recklessness on my part a few years back. My credit score is low 400's as a result of this. I have the ability to pay off this debt by settling for about half by the end of summer, but I feel I could make better use of that money in the mean time than to pay off the debt.

Sorry, how else are you going to invest $3000 to get double your money back?

What other plans did you have for the money?

[mattymo]

Sorry, how else are you going to invest $3000 to get double your money back?

What other plans did you have for the money?

I wasn't really looking at it from that perspective, but I had intended to buy and resell some cars. No guarantee but it's a good possibility I could have seen a double in capital by the end of summer. Either way I think I'm going to commit to paying off my debt. I'm going to push hard to get the items completely removed from my report, which I read is really the only way to improve your score. Thanks for all the replies.

[JoshuaHeckathorn]

I wasn't really looking at it from that perspective, but I had intended to buy and resell some cars. No guarantee but it's a good possibility I could have seen a double in capital by the end of summer. Either way I think I'm going to commit to paying off my debt. I'm going to push hard to get the items completely removed from my report, which I read is really the only way to improve your score. Thanks for all the replies.

Good choice- pay off the debt and forget the whole auto loan idea. And yes, it's important to remember as you work with the collection agency that a "paid" collection is just as damaging to your FICO scores as an "unpaid" collection.

So, just because a collection updates as paid doesn't mean your credit scores will all of sudden jump. If you can't convince them to work with you and improve how it's being reported in return for payment, it's not the end of the world either. Your scores will improve as time passes and the collections age until they eventually fall off completely.

[cjscully]

I wasn't really looking at it from that perspective, but I had intended to buy and resell some cars. No guarantee but it's a good possibility I could have seen a double in capital by the end of summer. Either way I think I'm going to commit to paying off my debt. I'm going to push hard to get the items completely removed from my report, which I read is really the only way to improve your score. Thanks for all the replies.

Settling your debt is the right thing to do. In my experience there is a trade off when negotiating with creditors. The trade off is often discount vs deletion from the credit report. If you want the balance steeply discounted you may not be able to get the deletion too. It's not an impossible combo to get but it's not nearly as straightforward as getting the debt discounted and reported as settled on the credit report. Some creditors flat out refuse to negotiate on the subject of how the debt is reported.

[mattymo]

Thanks a lot for the input guys. I'm gonna be calling some collectors in the next few days. Does anyone have any advice on how best to negotiate with them with the goal of getting it permanently removed as well as paying as little back as possible?

[disneysteve]

paying as little back as possible?

Sorry but your goal shouldn't be to pay back as little as possible. This is legitimate debt. You borrowed the money. You owe the money. If you aren't able to repay it all, you should repay as much of it as you can. The negotiation should be, "Here is what I've got. If you are willing to accept that as settlement in full, send me a written confirmation of that and I will send you the payment."

Remember, don't do anything until you have it in writing and never, ever let them have electronic access to your bank account.

[mattymo]

Thanks Steve. One more question - I just got a copy of my report from Transunion through annualcreditreport.com. Under adverse accounts, it's showing the the original creditor, as well as the collection agency that bought the credit. Under the orginal creditor, it's saying, "picked up by another lender" and "charged off as bad debt". Will it be possible to get this entry deleted once I have resolved the debt with the creditor who picked it up? Thanks

[disneysteve]

Under the orginal creditor, it's saying, "picked up by another lender" and "charged off as bad debt". Will it be possible to get this entry deleted once I have resolved the debt with the creditor who picked it up? Thanks

I'm no expert on credit reports but my impression is that you can only get entries removed if they are factually incorrect. What that creditor has reported is true. They wrote it off as bad debt and sold the account to a collection agency. Even if you pay it in full today, it would still represent bad debt to the original creditor since they wouldn't get the money - the collection agency would.

[DebbieL]

I'm no expert either, but I believe what you would have to do is file a note with the credit agencies that has an explanation of it (your side of the story). This will show on your file - but it won't delete the other thing. Good luck.

[mattymo]

Alright, I'll check into that. Thanks for all the advice guys, I appreciate it.

[JoshuaHeckathorn]

Thanks Steve. One more question - I just got a copy of my report from Transunion through annualcreditreport.com. Under adverse accounts, it's showing the the original creditor, as well as the collection agency that bought the credit. Under the orginal creditor, it's saying, "picked up by another lender" and "charged off as bad debt". Will it be possible to get this entry deleted once I have resolved the debt with the creditor who picked it up? Thanks

After you pay off the collection, you may want to consider sending a goodwill letter to the original creditor requesting that they remove the charge off as a courtesy now that the debt has been paid off. Some will and some won't. Since it was a charge off for them, they have every right to leave it the way it is. However, it never hurts to ask.

[dczech09]

You cannot have any remarks removed from you credit history if they are accurate. Your delinquency is factually correct, thus it cannot be removed. Lying or misrepresenting the truth in order to get this removed is criminal fraud, so do not even try it. You are stuck with the credit remark for some time now.

Your credit heals over time. Over time, you must show creditors that you can control your spending and pay what you owe. They will not take sympathy on you for this situation.

Another thing that is not mentioned is this: if you settle you debt for less than its worth, and the forgiven amount exceeds $600, creditors AND debt collectors are required to report this to the IRS as an earned income. This means they will file a 1099 (non-employment income) form in your name and you will become liable for taxes on the forgiven amount. So if you settle for $3,000 and have the other $3,000 forgiven, you will owe income taxes on that $3,000. Please refer to the following website:

Forgiven credit card debt is often taxable: 1099-C forms follow debt settlement

Not a lot of people realize this, so they often run into tax issues after a settlement. You need to take this into consideration.