Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

On collections I owe about $2250 (I don%26#039;t agree with the amount on some of the accounts), and between 3 Credit Cards and one Line%26#039;s of Credit I owe $1100 (on a total limit of $1350). I only have a savings of $750 which I have worked up over the past 6 months, I did not have a savings before that. What is most important for my financial health and improving my credit at my current age - 26. To pay off the collections, to have a cash reserve/savings, or to pay off the credit cards? It is difficult to do all at once, especially as I am still in a situation in which I am living paycheck to paycheck.

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

I can see that you are thinking. You included a lot of detail.

Keep the $750 savings, but remove it from your savings account or your creditors may attack it. Paying off the credit cards that you have right now is the best choice for your credit health. Debt to Credit ratio is worth between 35-40% of your score. It%26#039;s the biggest slice of the FICO/Vantage score pie.

Paying the collection accounts WILL NOT improve your score. They stay on there and rock your score regardless of whether or not you pay. Next, you want to try to find more ways to bring in additional income. Start putting aside money to pay off your collections. Since the debts you owe are so small, it is doubtful that the agencies will sue you for it. When you are able, settle with each. My experience tells me they will accept a 40% settlement. You don%26#039;t appear to make a lot of money which is in your benefit. However, you are young. They know they can milk you for a long, long time and you will be able to pay their price over time. The key in negotiation is to have 50% of the debt. Then, start off low at say 25% of the debt and gradually increase your offer. Make your sob story sound good and really play down your potential earnings in life. Do not talk about going to college, etc. Just make it sound like you are a loser and that your family hates you. Maybe it%26#039;s true. More to your benefit in this scenario.

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

I would pay all your debt%26#039;s first, then look into savings. Debts are like chains that continue to hold you. Credit card interest can also be very expensive.

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

I use to work in collections for many years, and any time you have the ability to pay off your credit cards in full, do it! It will improve your credit score in due time. The best rule of thumb is if you do not have the cash for it, do not buy it! I know that at 47, I am still trying to learn some restraint :)

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

If you have an amount in collections - It is best to pay that amount if at all possible - over and above having savings. If you have a disagreement with the amount, have you written your creditor? Many will suspend requirements for payment while the amount is in dispute.

After you pay your collections, you need to pay your credit cards and line of credit off if at all possible. At the very least, you need to pay the minimum balance - and then anything you can spare pay on the card/account with the highest interest.

At this point, the only benefit to you for having savings would be if the savings interest is higher than all of your credit cards/accounts. Which I will bet it is not.

You may even want to consider taking a second job, and designating 1/2 of that amount to paying off your credit, and the other 1/2 will go to expenses that you incur by having two jobs (more gas, more frequently buying pre-processed foods, etc.)

At 26, you are an adult and should act like one and pay everything. After you get your credit paid off, THEN start saving until you have at least 3 months income in reserve. Then you can quit your second job (or keep it and have more income.)

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

Pay the debt (including the monies in colections) with the highest interest rate first!

There is no sense in saving money at some meanial savings account rate when you%26#039;re paying (proably) 3 times than in interest on the debt.

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

unless your savings money is making you more interest than the interest you are paying on your credit cards, i would apply that money to your credit cards paying the highest interest barring ones first. as far as the collections go, call the creditors and find out what dollar amount they will settle for. a lot times they will drop the amount so you can pay them off.

Fixing Credit: Paying Debt vs. Saving vs. Collections. Which is best?

I agree with Legend, with one exception. Use the $750 to knock out some of your debt. This will reduce interest charges and penalties, and free up more cash to knock out the next one.

You are going to need strength and determination, but this can be done. Sit down and write out a detailed budget! This is your first tep, and most important one. Cut all expenses that you really don%26#039;t need. Apply all %26quot;spare%26quot; cash to your smallest debt, and so on.

Possible tip: If any of the cards are already in collections then you should try to negotiate a settlement. You will know if this is the case because the bank you took the card with won%26#039;t talk to you, but some other collector is calling. Offer them 50% of the balance for settlement in full. But get it in writing and make sure your cash will cover it.