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Topics addressed on March 31, 2010:
Paying off credit cards likely will save money in the long term
I came into a lump sum of money and want to pay off my credit cards. I was thinking about negotiating down the two higher balances until I heard that it can actually hurt your credit score. Is that correct? Should I just pay the full amount rather than negotiating a lower amount to pay?
Negotiating a reduced payment amount might leave a little cash in your pocket at the moment, but paying the debts in full may end up saving you money in the long run.
When you negotiate a reduced payment amount, the lender may report the account as “settled for less than originally agreed.” Anytime a debt is settled, it will negatively affect your credit scores.
How much a settled status will hurt your scores depends on where you stand with the account. If it has been placed for collection, then you already have bad scores and settling may help you close the account and move on. If you have had no delinquencies, then a settled status will result in a major drop in scores.
Poor credit scores can make it difficult to get credit when you need it, or result in higher interest rates or fees if you can qualify. So, the money you saved by negotiating a lower payment may be lost to higher costs for future credit.
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- The "Ask Experian" team