I received this question from a Money Girl Podcast listener named Annemarie who wants to know how to pay off credit card debt:
I have come into enough money to pay off all my debt. Should I pay them all off at once or work my way down? Do I call the company first for the payoff or just pay the balance due on next month’s bill? Should I negotiate the balance due with the company or will this hurt my credit?
Congratulations on being able to pay off your credit card debt. That is fantastic for your financial future!
If you negotiate with a credit card company to lower your outstanding balance, there are a couple of negatives that could occur. One is that your credit report will show a “settled” account, which can significantly lower your credit score and also looks bad to future creditors.
The other issue is that settled credit card debt is taxable. That means you don’t really reduce your outstanding balance as much on an after-tax basis. I recently wrote a blog post and recorded a Money Girl Podcast about this topic, so be sure to check them out for more information.
I would pay off the balance in full on next month’s bill–UNLESS you don’t have a healthy emergency fund saved up. If you don’t have at least 6 month’s worth of your living expenses saved in an FDIC-insured high-yield savings account, that should be your first priority for a portion or all of your newly acquired money. Without an ample emergency fund to get you through a financial rough patch or to pay for a high unexpected expense, you might find yourself back in credit card debt.