Paying Late Drops The Score

Collectors will take a smaller payoff amount on Greg's credit cards, but he wants to know how that will affect his credit score.

QUESTION: Greg has a $7,500 credit card debt that went into collections. The debt collectors are willing to settle for $4,000. He paid it off, but wants to know how that affects his credit scores. There are better and worse things, as Dave explains to him.

ANSWER: It damages the credit score, but not as much as not paying it. Paying in full is the best thing, and not paying shows deadbeat status, so this is in between. Think about how you’d feel if someone paid you like this. If they didn’t pay, you’d feel stiffed, and that’s the worst feeling. If you got paid in full, that would be the agreed arrangement and you’d feel pretty good. If the guy was broke and you got what you could, you’d feel like a bird in the hand is better than 3 in the bush. You wouldn’t feel as good about him as the guy who paid, but you wouldn’t feel as bad about him as the guy who didn’t pay. That’s exactly what it does to your credit.

A credit report doesn’t take into consideration things like job losses or stuff like that. They just look at the actual status of the debt and the actual situation that happened. That’s what you’re facing.