Edward McClelland might be my new hero. Or he might be a poster child for the kind of irresponsibility that helped create this financial mess.
McClelland is a 42-year-old writer from Chicago who The New York Times decided would make the perfect anecdotal lede for a story about a new trend in personal finance: delinquent credit-card customers who strike a deal with the card issuers to pay a portion of their balances and thereby settle their accounts.
McClelland got behind on his payments for his HSBC credit card and his account fell into delinquency. A bank representative kept calling him, finally offering him a deal: If he paid his tab, minus 20 percent, they would consider the matter closed. No sale, McClelland said. A few weeks later, they called again. This time, it was he who made the offer: How about half? Deal. So McClelland wired the bank $2,743 –– half of his balance of $5,486 –– and he and HSBC parted ways amicably.
"Having this over and done with was appealing,” he told The Times.
You don't say. I don't know what to make of this Edward McClellan. I know what it's like to be a writer on a budget, but judging from the picture of him in the paper, he seems to live in a reasonably cool apartment in a great (i.e. expensive) American city. Then again, I see nary a stick of furniture in there. Here's an interesting nugget: If you check out his website, you'll find that he's written a book called Horseplayers: A Life at the Track, in which he writes about spending "a year at the races." I cast no aspersions here.
I don't dislike Ted. But people who are paying their bills on time and taking responsibility for the purchases they've made (like the daily Racing Form) probably aren't big fans of his. And $5,486 isn't that much, relatively. The indignant part of me is thinking that some people are taking advantage of the recession –– and the steep default rates the card companies are enduring –– to force settlements for a fraction of their balances. As the Times story points out, card companies are getting desperate because they have little leverage over customers who are on the verge of default. Once an account is delinquent for six months, regulators force banks to write off the debt as zero. So they'd rather settle for a little money rather than get nothing later.
On the other hand: Cry me a river, HSBC, and the rest of the big card issuers. As with mortgages, many banks got in trouble by making enticing offers to customers whom they didn't even check out fully (what happened to all of this sophisticated deep-dive data analytics that's supposed to be available?). Credit card companies deserve extra opprobrium for jacking up interest rates and slashing balances needlessly, a pattern of greed partly addressed by newly signed legislation.
Even as I shake my head at this debt settlement trend, I'm already thinking: Could I get away with it? Because it may actually be a shrewd move. One point the Times story barely addresses, though, is the potential damage this kind of strategy could have on one's credit report. The only mention is this sentence: "The creditors also point out that a delinquency, like a foreclosure, destroys a credit record."
But to what extent? Is it worth the hit you'll take?
Any financial advisers wish to weigh in on this?
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I think that the number of Americans who are actually “criminals” is quite small. But we seem to have created a culture in which people think that they can “game the system” with impunity. They cheat on obligatons and trick themselves into not acknwledging that it is dishonorable.
There is just a huge difference between people who have debt that has become a burden due to job loss or health expenses, whatever, and someone who just feels that he, in effect, can get something for nothing.
Buying something at 50% off from a merchant who has a reason for selling at that price is still an honorable contract. Buying something at full price and then welching on half the credit card debt may be identical from a mathematical standpoint, but it is dishonorable.
I’m Edward McClelland, and I say, don’t do it. I only took a settlement because my credit rating was already ruined, due to losing a job and not getting unemployment.
I don’t feel too guilty about what I did, because originally, that card had $11,000 in debt. When you combine what I’d already paid, plus interest and fees, plus the settlement, I paid back more than I borrowed, with a tidy 10% profit for HSBC. I think we both did OK here.
Hello Landon,
As far as what type of hit one will take on their credit score and whether or not settling the debt is worth the hit, it will definitely depend on the individual circumstances.
The short simple answer is that a number of things make up an individuals FICO score. Things like credit history, debt to credit limits, derogatory information etc. The more “good” vs. “bad” things, the better the score.
Settling a debt for less than the full balance is considered a “bad” thing according to FICO. Mainly because a creditor typically will not settle a debt unless the account is significantly delinquent. A seriously delinquent account will show on a credit report as a “30-Day”, “60-Day”, “90-Day” late etc.
How bad of a hit this will be to the overall score depends on the number of accounts that get settled and the number of “good” things that remain on the credit report. Things like other credit accounts that are still in good standing, mortgage, car payment, other credit cards etc.
That is the main way that settling your debts for less than the full balance will affect your FICO Score.
To address whether or not it is worth it, again depends on the individual. What do they use their FICO score for? Do they depend on a good FICO to earn a living? Is their score in the dumps because they are already behind on their bills?
So it is up to the individual consumer to educate themselves about the pros and cons of all of the different options to deal with debt and determine what makes the most financial sense for them and their situation.
Only then can they answer the question: Is the savings worth the hit?