Does Debt Settlement Affect Your Credit Score?
How does using debt settlement affect your credit rating? The answer may surprise you.
Debt Settlement - A Quick Intro
Debt settlement is an aggressive approach to reducing or eliminating your debt as fast as possible. Usually the debtor is facing serious hardship or even bankruptcy. Debt settlement is normally negotiated by a third party agency on behalf of the debtor, or it can be done by the debtor himself. The end result is that the creditor agrees to settle the debt for a lower amount than is actually owed.
During the process of settlement, the debtor will receive a letter from the creditor stating that the debt has been fulfilled, at which point the creditor reports the debt as “Paid”, "Settled” or "Settled for Less than Full Balance”. Creditors agree to settlements because they know that if you go bankrupt, they get nothing. So to them, something is much better than nothing.
Your All Important Credit Score
Realistically speaking, once you have reached the point that debt settlement is an option, your credit score is probably already suffering a great deal. Your debt to income ratio is high, your debt to credit ratio is also probably high, and you've probably already missed some payments, or have been late on a few. All these factors have already brought your score down considerably.
The first thing you should do is check your credit score to be sure it is as good as you think it is. If you are carrying high balances with most of your card accounts nearly “maxed out”, your score is probably mediocre at best. Working with a debt settlement company will only help you in the long run.
The truth of the matter is that debt settlement will probably NOT have a tremendous adverse effect on your credit rating.
After my settlements, my scores on average dropped about 23 to 50 points, but now a couple years later, they have easily recovered.
In fact, only 6 months after my last settlement,
I was able to get a loan on a late model minivan at a very competetive interest rate.
Delinquencies, which you most likely already have, are what fuel a negative impact on the FICO score. So if you take care of the delinquencies and bring the balances down to zero, your credit score goes back up.
Most creditors won’t work with you until your account is almost at the “charge off status”, which is what a creditor does not want to happen. Once your account goes delinquent for more than 180 days, this is how a credit card company sees your account and they know you are in trouble.
Your Credit Score Goes Down Only Temporarily
The good news is that your credit score will only be affected temporarily as compared to how long it will take you to pay off the debt paying the minimum payments. That could reach into the 20 year plus range and your rating would suffer the entire time.
By using a debt settlement process, you will not only settle the debt but also get the balances on those accounts to a “settled” status.
So debt settlement will not permanently hurt your credit rating. In fact, NOT settling your debt will have a greater impact on your credit score for a much longer time. In addition to getting the debt taken care of, you will also get rid of your physical reactions to the stress. Sometimes, this even means losing sleep at night worrying about your debts.
Find yourself a reputable debt settlement company and interview with them. Choose carefully and you will find more relief than just financially and monetarily.
