What to do with a charge off?

[pnkgirl25]

Hi guys. 

Im in the process of trying to buy a house and need to raise me credit score as quickly as possible. I have about 8,000 I can put towards cleaning up debt but I'm. It sure what's the best way to use it. Here is what I'm working with :

USAA credit card $8k Charge off DLA 5/16

USAA credit card $5k Charge off DLA 3/17

USAA personal loan $7k  Charge off DLA 3/17

TFC Financial $7k (Private Student loan) Collection DLA 3/17

the USAA credit card accounts I am currently making payments of $50 the TFC account I am currently making payments of $50 nothing is being paid on the USAA loan

I personally would like to pay off the USAA accounts because I would like to be able to use them in the future. TFC if at all possible I would like to settle. What's the best way to handle this. Do I write a PFD letter to TFC offering 1/2 of the balance and hope they agree and then just start to pay USAA over time? Can I negotiate a PFD with the collection agency?

[pnkgirl25]

Okay quick update. Spoke to TFC and they have agreed to remove the trade line as long as I pay $3,500. She is going to send over an email for approval in writing and then get back to me.

USAA offered to settle one of the accounts for 1/2 but the trade line will read settled . I'm thinking this is bad. I told her to give me sometime to think about it and I would get back to her. 

Any thoughts or tips. I feel like I really should just pay USAA in full so I don't burn that bridge in the future

[Anonymous]

I am going through the same thing. Applied for a mortgage with my husband and need to get my scores up as soon as possible. I'm taking the loan officer's advice on handling the collections/charge-off. 

I was told by the lender, "the damage is already done with the collection reporting, so just settle the account and get it to update as $0 balance". You'll also see from others on here that FICO has no way to distinguish a paid collection versus an unpaid collection. It's the fact that the collection is on your report. The overall goal should be to get the tradeline deleted if you can. 

I've done that now with my collections and now focused on paying down $1,800 in credit cards, which will be done by mid-May. 

[DollyLama]

In addition to these major derogs, do you have any positive tradelines? CCs balance/line of credits, installment loans in good standing balance/high credit? 

There could be other ways to bump your score if you do. These charge offs are quite a chunk, either way you go. Settled will still stay on your bureau from the date of first deliquency for 7 years. A delete/removal is forever gone, but you will still have the others. I don't think a settlement will boost your score enough of what your are anticipating, since you will have 3 others still reporting. Reason I asked about positive tradelines. 

[Revelate]

Collections and charge-offs are scored differently; getting the collection deleted via payment may provide some points, but charge-off's (CO's) suck.

Settled is not a good tag to have, and similar to DMP's has been stated as a FICO negative in the past but I haven't seen any hard data around that personally and without that, hard to say.

Optimizing for point in time credit score, need to know the positives and where you are from a revolving utilization perspective and similar (which is another reason CO's suck as if there's a balance it counts full monty on the utilization side too).

What has the LO stated is mandatory to pay if any pre-mortgage, and what is your score now and what are you trying to get to?  This is going to be awkward honestly, I would do the PFD with TFC, and then see where I stood score wise before committing the additional 4500.

[RobertEG]

I concur with revelate.

There are two separate conditions relating to mortgage underwriting consideration of reported major derogs.

First is whether there is an express requriment that the delinquent debt be paid as an absolute threshhold to any approval.

Some underwrting requirements mandate payment, which others, such as FHA, can exclude some types, such as medical collections or those over a certain age.

Some unpaid collections may not be required to be paid, but a percent of the unpaid debt, such as 25%, might be required to be included in your debt to asset ratio calculation.

If the loan officer does not require payment, then the decision likely becomes one of whether or not a score improvement would be obtained.

Second is the effect, if they are permitted to remain unpaid, on your three-digit score.

Paying usually wont provide immediate score improvement unless you get the derog deleted via a PFD.

However, paying a CO might have secondary scoring impact of reducing your % util if the CO is on a revolving account.

Lots of subtle scoring and non-scoring issues arise in mortgage underwriting, and it is difficult to provide general advice.......

[Anonymous]

+1 to what RobertEG said. 

Best advice is to talk with a loan officer and see what needs to be paid. We're doing FHA, and our lender told me to not pay my medical collections as they are excluded from my application. 

I did however have to take care of my charge-off's and other collections. Lender's advice was to settle and have the balance report as $0. I questioned that because I know settling will leave the comment "settled for less than balance". However, our lender said the most important was having the balance at $0. Not sure if it matters, but my remarks show "paid in full for less than balance". 

I think my situation is also different because all of my collections and 1 charge-off are from 2011. They are scheduled to fall off between August 2017-January 2018. So I'm sure if I need a letter of explanation that will be easier since they're so old. 

I will also add that I did have score increases from settling my collection/charge-off's. Look at my sig for mortgage scores. 

[RobertEG]

In granting a mortgage loan, the lendor does not want to be in line for possible recovery if the loan goes into default.

It is often a primary concern that a debt be discharged, regardless of whether it is paid in full or settled for less, which removes any possible judgment creditor obtaining first crack at your assets or placing a judgment lien on the property.

Settling for less is more of a manual review type concern than a legal  concern, as it informs others that you have a prior history of not paying the entire debt you accrue.

That means the prior creditor took a loss.  That can be a determining factor in not approving a loan with you.

When conducting any settlement negotiation, you can include as a condition of your settlement that the creditor agree not to make any reporting of settled/paid for less.

If they agree, the prior debt will simply show paid, and thus appear the same as if it had been paid in full.