Dear Creditnet: I have cleaned up my credit for the most part, but I still have a few old credit cards with balances that are reporting as collections on my credit reports. I could pay these off in full now, but the creditors are offering me settlements for about 30% of the actual balance. Will it help my credit scores more if I pay these off in full, or should I just accept the settlements and save the extra money? - Angela M. from AZ
Answer: Unless the negative marks are completely removed from your credit reports in return for payment, paying in full or settling the collection won't necessarily improve your FICO scores. In fact, both are still considered negative marks in the eyes of the FICO credit-scoring model, so you shouldn't expect to see a material difference in their overall effects on your credit scores.
For many consumers in your situation, this decision really becomes more of an ethical one. Should you pay off every dollar of what you think you truly owe? Or should you simply take what they're offering as a settlement and move on with life?
While I can't make this decision for you, I suggest you consider the fact that your debt has most likely been charged off by the original creditor and sold to a collection agency at a significantly discounted price. The original creditor has enjoyed its tax break, and now the collection agency has taken over to see if it can turn a profit by collecting more than what it paid for the debt.
The fact that the collection agency has offered you settlements at 30% of the actual balance means that they're likely accomplishing that goal. The major damage to your credit scores has frankly already been done, so now may be the time to think about making it your goal to save as much money as possible on the deal. However, if you do decide to settle, keep in mind that you could be required to pay income taxes on the forgiven debt.
This might not be a huge concern if the amount of forgiven debt is small, but for larger amounts it's definitely something you must factor into your negotiations. I suggest speaking with your lawyer or a qualified accountant about your specific financial situation before making a final decision.