I read a previous question that you answered
that really helped me concerning "Getting
rid of an old charge-off." In my situation, I've been making
monthly payments on my charge-off going on one year and now that
I have the balance down to a reasonable amount where I can settle
for 50 percent, I plan to do that. My question to you is, how do
creditors view a "settled charge-off"? Will this help
my FICO score? Keep in mind my goal for the year is to be able to
purchase my first home. -- Von
Congratulations on setting a goal for yourself and working to meet
the goal. You will remember your first home purchase for the rest
of your life.
Your question of how creditors will view your "settled
charge-off" is a good one and something with which you should
be concerned, given your goal of buying a home. To answer your question,
I am going to illustrate with an example.
You entered into an agreement with your creditor to
pay what you owe under certain guidelines and restrictions; namely,
to pay a certain amount of money each month by the due date. Let's
say you enter into an agreement with a friend to whom you loan $2,400.
The agreement states that the friend will pay you
$200 a month for one year to pay off the loan. The friend pays on
time the first three months, but the fourth month he says he can't
make the payment and will catch up next month. The fifth month he
pays you $100 and says he will make up the difference the next month.
The sixth month he says he lost his job and he will not be able
to pay the $1,700 he still owes.
You provided the money in good faith and trusted that
the friend would uphold his end of the agreement. In this case we'll
assume that you have enough money so that the loss of $1,700 is
not the end of the world, just as your charge-off is not going to
bankrupt your creditor. However, you would be leery and might be
a little crazy to enter into a new financial agreement with this
friend again if you expect to be paid.
Now let's say several years go by and the friend contacts
you regarding the money he owes. He offers to pay $850 and says
he hopes that you will accept that amount as final payment. You
agree to the arrangement and he sends the check.
My question to you is, how would you feel about entering
into a financial arrangement with this friend again? His attempt
to make good on the loan by paying half of what was owed may affect
how you feel, but more than likely you would avoid loaning him money
A potential creditor may look at your settled charge-off
in much the same way. Unlike you, however, creditors are in the
business to loan money. So while you may still qualify for a mortgage
loan, it may be at a higher interest rate or with a larger down
My advice is to suck it up and pay the entire amount
of what is owed. One last thing to consider is that if the amount
settled is significant, the lender will report the transaction to
the IRS. A debt that is forgiven becomes income, on which you
will owe taxes! So you could end up with a large unexpected
tax bill right around the time you are getting into your new home!
As to your question about the mechanics of FICO scoring,
variables are considered in your FICO score, but generally speaking,
if the account listing from your original creditor shows an unpaid
balance for the charge-off, your score will improve if you pay the
debt in full. A settled charge-off, in most cases, will not raise
your score and might lower it, depending on the strength of the
rest of your report.
The Debt Adviser, Steve Bucci, is the president
of Consumer Credit Counseling Service of Southern New England. Visit
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