Impact of Debt Settlement Amount on FICO Score

[Anonymous]

I have credit card debt with 3 banks totalling $48,000. I intend to do debt settlement with some or all three banks as a last ditch effort before doing a bankruptcy. I'd like to understand what impact the AMOUNT of debt settlement has on FICO scores. It seems there isn't a linear relationship between the amount of debt settled and the drop in your FICO score. For example, let's say you settle a $10,000 debt with one bank and your FICO score drops by 100 points. If at that point you settle another $10,000 debt with another bank, your score is not going to drop another 100 points; it would drop by something far less than that. That tells me that if you're going to settle debts, you shouldn't settle just a part of your debt; you should go ahead settle all of them. Does this sound right?

[Anonymous]

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@Anonymous wrote:

I have credit card debt with 3 banks totalling $48,000. I intend to do debt settlement with some or all three banks as a last ditch effort before doing a bankruptcy. I'd like to understand what impact the AMOUNT of debt settlement has on FICO scores. It seems there isn't a linear relationship between the amount of debt settled and the drop in your FICO score. For example, let's say you settle a $10,000 debt with one bank and your FICO score drops by 100 points. If at that point you settle another $10,000 debt with another bank, your score is not going to drop another 100 points; it would drop by something far less than that. That tells me that if you're going to settle debts, you shouldn't settle just a part of your debt; you should go ahead settle all of them. Does this sound right?

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As with everything else, the effect(s) on scores varies from person to person.  One thing you can count on, however, is the higher your score the more a negative will lower it.  So if you have an 800 right now, expect your score to drop much more than if you had a 500. 

There is no way to measure how much your score will drop per dollar settled.

[Anonymous]

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@Anonymous wrote:

As with everything else, the effect(s) on scores varies from person to person.  One thing you can count on, however, is the higher your score the more a negative will lower it.... There is no way to measure how much your score will drop per dollar settled.

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Thanks. Understood. And I don't expect find an exact answer to my question, but I was looking for qualitative answers based, that the general principle applies.

[MarineVietVet]

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@Anonymous wrote:

I have credit card debt with 3 banks totalling $48,000. I intend to do debt settlement with some or all three banks as a last ditch effort before doing a bankruptcy. I'd like to understand what impact the AMOUNT of debt settlement has on FICO scores. It seems there isn't a linear relationship between the amount of debt settled and the drop in your FICO score. For example, let's say you settle a $10,000 debt with one bank and your FICO score drops by 100 points. If at that point you settle another $10,000 debt with another bank, your score is not going to drop another 100 points; it would drop by something far less than that. That tells me that if you're going to settle debts, you shouldn't settle just a part of your debt; you should go ahead settle all of them. Does this sound right?

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Scoring doesn't take into account the dollar amount of a collection or charge off. It's the notation of collection or CO in and of itself that is looked at although paying off a CO in some cases will help if the CO is a credit card and the balance is being factored into utiliztion.

Be aware though that a notation of a "settled" account is scored the same as a CO. You might be better off score wise to try PFD's on these debts.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[RobertEG]

Marine, can you explain how a settled for less than the full amount enters into credit scoring, and particularly how it is considered a major derog at the same level as a charge-off?  I was unaware that this was even a factor in credit scoring.....

All accounts that are "settled," be they for the full amount or for less than the full amount, result in a current account status of paid.

Paid for less is entered via a special comments code.  Does FICO score those codes?  The special comments dont record the $ amount of any settlement, so how would FICO know the amount?

[Anonymous]

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@MarineVietVet wrote:

Scoring doesn't take into account the dollar amount of a collection or charge off. It's the notation of collection or CO in and of itself that is looked at although paying off a CO in some cases will help if the CO is a credit card and the balance is being factored into utiliztion.

Be aware though that a notation of a "settled" account is scored the same as a CO. You might be better off score wise to try PFD's on these debts.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782 

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 Thanks MarineVietVet! Got some questions though:

1) What is "PFD"? Paid full debt? (Sorry I'm new to this).

2) And when you say "try PFD's" you mean when settling, specifically negotiate for the bank to put report that, right?

3) So, if it's the notations that are used to calculate scores, then I assume the formula takes into account the number of notations? In other words, two "settled" notations result in a lower score than a single "settled" notation. Right?

4) Many (most?) debtors are able to settle with banks only after the account goes almost 180 days past due, or, after 180 days get charged-off. When that happens, do the notations add up? Do you get all three of these: "180 days past due", "charged off", and "debt settled for less than owed"? And if so, do the 3 notations together result in a lower score than a single bankruptcy notation?

I realize there may not be clear answers, but I thought I'd ask. And if I'm asking the wrong questions, I'd like to know that too.

Thanks all.

[MarineVietVet]

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@RobertEG wrote:

Marine, can you explain how a settled for less than the full amount enters into credit scoring, and particularly how it is considered a major derog at the same level as a charge-off?  I was unaware that this was even a factor in credit scoring.....

All accounts that are "settled," be they for the full amount or for less than the full amount, result in a current account status of paid.

Paid for less is entered via a special comments code.  Does FICO score those codes?  The special comments dont record the $ amount of any settlement, so how would FICO know the amount?

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Hi Robert,

FICO looks at the comments within each TL and scores most of them. These include "charge-off", "paid charge-off", "paid for less than full", "legally settled for less than full balance", "election of remedy", "included in bankruptcy", "account in dispute - reported by subscriber", "repossession", and many others result in a FICO impact, in some way or another. Other comments like "Student loan not in repayment", "Account closed by credit grantor", "Unrated", or "Sold to another lender" are ignored by FICO (among others too).

With regards to this thread, "charge-off", "paid charge-off", and "paid for less than full" or any "settled" comment are scored equally and on par with each other. Why? Lenders want to know that if they loan money to you that you'd pay them back in full. If you settle an account, then the OC looses out on principal and/or interest. It hurts them. Since lenders have input with FICO, these comments are negative comments and scored as such.

FICO ignores the settlement amount (probably because it isn't reported). It's just like a CA or any charge off. It doesn't matter if you owe lots of money or none at all, FICO will ding you the same.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[MarineVietVet]

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@Anonymous wrote:

 

 Thanks MarineVietVet! Got some questions though:

1) What is "PFD"? Paid full debt? (Sorry I'm new to this). PFD means "Pay For Delete". It simply means that you offer the creditor a certain amount of money in exchange for them removing the negative item completely from your reports. That is why a PFD is better than settling because if successful the PFD results in no derogatories showing on your reports. You can do a search here onsite for a particular creditor and read what others have tried in their PFD attempts and see what seems to work or not work. PFD's won't always work but they are accepted in many cases. Just remember to get any agreement with a creditor in writing before sending any money. Here is a list of Abbreviations.

 2) And when you say "try PFD's" you mean when settling, specifically negotiate for the bank to put report that, right? Try the PFD before any settlement.

3) So, if it's the notations that are used to calculate scores, then I assume the formula takes into account the number of notations? In other words, two "settled" notations result in a lower score than a single "settled" notation. Right? For any negative FICO looks at the severity, recency, and number of entries so yes 2 settled accounts are worse than 1.

4) Many (most?) debtors are able to settle with banks only after the account goes almost 180 days past due, or, after 180 days get charged-off. When that happens, do the notations add up? Do you get all three of these: "180 days past due", "charged off", and "debt settled for less than owed"? And if so, do the 3 notations together result in a lower score than a single bankruptcy notation? From what I've learned here a CO can happen at any time although in most cases the creditor waits anywhere from 120-180 days before the CO. So a CO can occur after only 30 days. As for whether 3 settled accounts would be scored worse than a BK entry? I am not sure about that at all. I will let someone else who knows comment on that.

I realize there may not be clear answers, but I thought I'd ask. And if I'm asking the wrong questions, I'd like to know that too.

Thanks all.

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[Anonymous]

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@MarineVietVet wrote:

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

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@Would you care to explain how your score is now @ 782-835 after a bankruptcy just 1 year ago? That seems amazing.

Thanks!

[MarineVietVet]

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@Anonymous wrote:

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@MarineVietVet wrote:

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

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@Would you care to explain how your score is now @ 782-835 after a bankruptcy just 1 year ago? That seems amazing.

Thanks!

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I only wish it had gone up that fast.  LOL

I actually say: a BK years ago; not one year ago.

I made many mistakes after my BK (still do) but I was determined never to get myself in that situation again. IIRC (If I Recall Correctly) after I filed in 1993 I was never late on any payment going forward. That is the best thing anyone can do for themselves (long term) to help with scoring.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".