Should I use $10,000 dollars for my emergency fund or pay off collection debt?

Hi . I have $10,000 saved. Would it be smart to use this money as an emergency fund or instead should I just pay off $9,000 credit card debt in collection that is affecting my credit score ?

Hey Angelina!

Let me ask you this: If you has $1,000 in cash and $0 in debt, would you go to a collection agency and borrow $9,000 in cash so you can put it in your emergency fund and start making payments to them? PROBABLY NOT, RIGHT? So yeah, I’d use that cash to get out of debt, then use your future income to build up the e-fund.

That said, if the $9K is already in collections, you might be able to settle with them for a lot less than $9K. You could call/email them and make them an offer. i.e. “If I pay you $3,000 today will you wipe out my debt?”. Sometimes they don’t expect to even get 25 cents on the dollar so they’ll make a deal. But if you do, make sure to:

  • Get it in writing (that your debt is paid in full if you make $X payment. This can be an email)
  • Don’t give electronic access to your bank accounts… or they might just clean you out and say you owed and there won’t be much you can do. You can send them a money order or cashier’s check to cover the debt.

I’m not an expert in that kind of collections negotiation so I would suggest doing some more research if you go that route.

Either way, I think you’ll feel better when the debt is gone. Also, going forward, I would try to get FULLY out of debt. (Do you have other non-collections debt?) And stop worrying about your credit score and start worrying about your NET WORTH.