Why Debt Settlement Can Ding Your Credit Score
Why should it have a negative impact, when you’re lightening the load of your obligations and your creditors are getting some money? Because strong credit scores are designed to reward those accounts that have been paid on time according to the original before they’re closed.
A debt settlement planin which you agree to pay back a portion of your outstanding debtmodifies or negates the original credit agreement. When the lender closes the account due to a modification to the original contract , your score gets dinged. Other lenders are likely to take notice and be warier about granting credit to you in the future, too.
Still, it is possible that the reduced debt burden is worth a subsequent drop in your credit score. The high and late or missed payments have likely already lowered it somewhat. If debt settlement jump-starts your path toward a sounder financial future, it should be considered.
Let’s examine the process in more detail.
Will Paying Off Old Debt Boost Your Credit Score?
Pay Your Bills On Time
This might be the single most important factor to help build up your score, especially if you have a mortgage or car loan youre current on, or a credit card account in good standing. Paying your bills on time applies to all bills, including rent, utilities, even your internet or phone bill. And if youre behind on any bills, get them current as soon as possible.
Debt Management Plan: For Long
If you have enough income to handle your debt load, and just need some help organizing a budget that you can live with, a debt management program could be the right choice for consolidation.
Debt management plans are administered by nonprofit credit counseling agencies and can help you consolidate debt without have to take out a loan or do lasting damage to your credit score.
Pros:
- You receive a reduction in the interest rate, which should reduce the amount you pay on your debt to an affordable level. In return, you promise you will make steady monthly payments until the debt is paid off.
- Monthly payments are fixed and have a definite end date, usually between three and five years.
- This is not a loan, so you are not adding to or trading one debt for another.
Cons:
- Debt management plans require you to close all credit card accounts involved in the program, which will cause a short-term drop in your credit score.
- There is a monthly fee associated with the program.
However, at the end of the DMP, the notice vanishes with no lasting effect your score will have benefited by a steady series of on-time payments and you will be absolutely ready to start afresh, with the knowledge gleaned from your credit counselor, and the experience of having conquered your debt monster.
Don’t Miss: Td Bank Prepaid Visa Card
How Long Does It Take To Rebuild Credit After Debt Settlement
Your overall credit history will play a role in how fast your credit bounces back after settling a debt. If you otherwise have a solid credit history and have successfully paid off loans or are in good standing with other lending institutions, you could rebuild your credit more quickly than if you have a larger history of late payments, for example.
The further in the past your debt settlement, the better your credit report will look. Still, there are some things you can do to help your over time by focusing on establishing a solid credit repayment pattern:
Ordering A Free Credit Report
Each of the major credit bureaus is legally required to give you a free credit report annually, although you may have to pay extra to access your credit score. Checking your credit report once per year can help you identify fraud and check for mistakes made by credit reporting agencies. Itâs not uncommon for credit reports to contain inaccurate or incomplete information that can make your credit score worse than it should be. These inaccuracies can be fixed by you or a .
Don’t Miss: Synchrony Bank Gas Credit Cards
Myth No : I Have To Pay Someone To Help Me Settle My Credit Card Debt
The truth: I proved that myth is not true, says Kenny Golde, author of The Do-It-Yourself Bailout.
Golde is a filmmaker whose partner became ill and died while they were making a movie. By the time the film was completed and it became apparent the film wasnt selling in a timely manner, Golde was $250,000 in debt. He consulted with a bankruptcy attorney, who told him about debt settlement.
Golde had heard a lot of debt settlement companies are scams. He figured no one would work as hard on his behalf as he could. Besides, he says, Here was a challenge, and I wanted to move forward and meet that challenge.
Golde successfully negotiated his debts and saved nearly $150,000.
On the other hand, having an experienced negotiator on your side can help.
You call and try to negotiate a balance, and its like, Get in line. A card companys attitude may be, Yeah, you and everybody else, says Ken Clark, author of The Complete Idiots Guide to Getting Out of Debt.
Based on experience negotiating with creditors, debt settlement companies know what percentage of debt owed each creditor is likely to agree to, Gordon says. The pros also have more leverage with creditors due to their volume of business.
Its kind of like, you can change your own oil in your car, but that doesnt mean youre going to do it the right way, Gordon says.
Is It Worth The Impact To My Credit Score
Think of it like this: to get ahead of the debt cycle and get out of debt, you might have to take one step back to take two steps forward. Yes, your credit score can go down by working with a debt settlement company or law firm, but in the long run, you will resolve these debts, which can increase your score and creditworthiness for the better.
It has to be done carefully and by a professional law firm experienced enough to understand credit, debt, and the impact of debt settlement on your credit score.
Also, if debt settlement is the last resort for avoiding bankruptcy, your credit score will take less of a hit going through this process than by trying to get your debts completely discharged.
Recommended Reading: Requirements For Best Buy Credit Card
The Basics Of Debt Settlement
Debt settlement programs are designed to help you settle debts with your creditors for less than what you actually owe. It is best for those who owe more than $10,000 in consumer debt but have not yet reached the point where a consumer proposal or bankruptcy is the only viable solution. A professional can help you determine whether or not debt settlement is right for you. If you have some money saved already or will be able to save some over the next few months, debt settlement is particularly attractive because most creditors like to settle debts for a lump sum payment and you may be able to settle for pennies on the dollar of what you owe.
How To Rebuild Your Credit After Debt Settlement
The best thing you can do to build up your credit score is to pay your bills on time. Your payment history makes up the biggest slice of your credit score at 35%t. The next best thing you can do is to keep your credit balances low, to keep a good credit utilization balance.
If you still have open accounts, such as a mortgage or credit card, make your payments on time. If, after settling your debts, you dont have many or any credit accounts left, you might consider asking a trusted friend or family member with good credit history to become an authorized user on one of their longer established credit cards. That will help you start rebuilding your credit history faster.
Recommended Reading: Best Buy Credit Card Capital One
How Long Will A Debt Settlement Hurt Your Credit
- Added: August 27, 2019
How long will a settlement stay on my credit report?
A settlement can stay on your credit report for up to seven years.
But the good news is having your account say settled has less of a credit impact as if it were to stay unpaid.
And moving forward, if you were to continue to have good credit behavior then your credit will slowly begin to improve.
And if you would like more information about debt relief or debt settlement to click on the link below in our description, or visit us on our website atalleviatefinancial.com.
Is Credit Card Settlement A Good Idea
So, if you decide to settle and avoid paying the massive debt that has come to plague your rather smooth life, it will come at a cost your credit score will take a sound beating. Allowing a bank to settle your credit card debt is perhaps the worst idea, mostly because it severely impacts your CIBIL score.
You May Like: What Bank Is Ulta Credit Card
Can One Spouses Debt Settlement Hurt The Other Spouses Credit
Debt settlement has the potential to bring down credit ratings as a result of defaults, lower payments to eliminate the debt and the inability to pay the full amount of the loans. When a spouse decides to settle debts the relationship is sometimes affected due to concerns about whether it will influence both credit scores.
Debts Settled Is Better Than Debts Unpaid
Not paying all of your credit cards as agreed impacts your credit score negatively. A debt settlement can however, under specific circumstances, provide a somewhat positive notation on your credit report. When debts are listed in collections it means that payments have not been made as agreed for at least 6 months. This gives the debts an unpaid notation.
However, a debt settlement is a process by which you pay a portion of what you owe. Once a settlement has been fulfilled, as part of the agreement made with the creditors, you can request that they note that the debts have been settled rather than not paid. To a future lender, knowing that you made some payments is better than you making no payments and leaving a balance owing. This wont improve your credit score by much in the short term, as time passes it will.
You May Like: How Do I Check My Cabela’s Credit Card Balance
Late Payments Preceding Debt Settlement
Debt settlement will hurt your credit score more if the credit cards you settle are already in good standing and if you end up settling multiple credit card accounts.
Many debt settlement companies will advise you to purposely fall behind on your payments so creditors will be more willing to accept a settlement payment on the debt. The theory behind this strategy is the belief that lenders will only be motivated to settle debts that are at risk of not being paid. Following the debt settlement companys advice means several months of missed payments, which damage your credit even before you settle the debt.
Debt settlement information will remain on your credit report for seven years, but will have less of an impact on your credit score the older the information gets and as more positive information is added to your credit report.
How Debt Settlement Affects Your Credit If Youre Delinquent
If youre between 30 and 120 days late on your credit card payment, it is unlikely that a credit card company will agree to a debt settlement proposal. Creditors typically wait until consumers default or get close to the 180-day delinquency mark before even considering debt settlement.
Now, this information might be contrary to what a debt settlement company has told you. Thats an extremely important contradiction because while debt repair services often promise delinquent consumers miracle fixes, theyre really leading you toward credit score devastation.
All that a debt settlement company will do if you hire them when delinquent is simply ask you for a payment and then hold onto it until you default ruining your credit in the process. Only then will they negotiate a deal with your creditor or the debt collector that assumed your debt once the original lender wrote it off its books.
Recommended Reading: How To Pay Best Buy Credit Card On App
What Can I Do To Avoid Falling Into Debt
Prevention is always better than cure. Therefore, before we move on to see the best way to consolidate debt, lets look at some preventative measures you can take to keep debts at bay.
- Keep balances low to avoid additional interest.
- Pay your bills on time.
- Manage credit cards responsibly. This maintains a history of your credit report. Those who have no history of credit cards are considered bigger credit risks.
- Avoid moving around debt. Instead, try to pay it off.
- Dont open several new credit cards to increase your available credit. You run the risk of accumulating more debt.
Despite anyones diligence in managing their money wisely, sometimes financial hardships happen because of a job loss, medical condition, divorce, or other life events. If you have problems making ends meet, contact your creditors or approved credit counseling agencies for assistance.
The Goal Of A Debt Settlement
What you want is for your creditor to write off a high amount when settling your debt. Because this high write off from your creditor is very important, it is always a good idea to have a professional debt settlement provider negotiate on your behalf, as opposed to doing it yourself. The debt settlement company that you choose to work with will analyze your situation and should provide an offer that satisfies your creditors and yourself.
Don’t Miss: Best Buy Credit Card Requirements
Debt Settlement Has Risks
Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:
1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.
2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
You Wont Have To Pay Any Fees Until Your Debts Are Settled
In 2010, the Federal Trade Commission enacted the advance fee ban on debt settlement companies. The rule prohibits any debt relief company from charging fees before settling or reducing a customers credit card or other unsecured debt.
This means a debt settlement company cant charge you any fees until theyve officially settled at least one of your debts. So, you shouldnt be required to pay any setup or monthly administration fees on a debt settlement program. If you do, then the company must offer a money-back guarantee. If they dont, its a sure sign of a debt settlement scam.
Read Also: How To Pay Best Buy Credit Card On App
How To Get Out Of Credit Card Debt Without Paying Everything You Owe
Debt is tough. Sometimes it is hard to imagine getting out of it, and you can feel like your back is against the wall. One idea, that sounds good in theory, is to somehow get out of debt without paying it all off. Of course, this is an appealing strategy, but pursuing it can cause more harm than good. Here are the ways you can technically pay off debt without paying everything you owe, along with important reasons to consider other options instead.
Background
In this article, we are talking specifically about credit card debt. There are other types of debt that have forgiveness options, such as student loans. However, there are not typically formal forgiveness options through major credit card companies. When you use your credit cards, creditors have the full expectation that you will repay the money. After long periods of missed payments, your creditors may lower these expectations and charge-off the accounts and send them to collections. After this period, there may be opportunities to pursue alternative payment arrangements for less than what you owe. However, these always accompany damage to your credit score.
Settlement
Debt settlement is not cheap, either. You can expect to pay fees between 15 and 25 percent of the enrolled debt. On top of that, if your debt is forgiven then the forgiven amount is treated as taxable income!
What about DIY settlement?
Bankruptcy
Better Options
Recap
Understanding Your Debt Payoff Options
While it’s best to pay off debt that’s in collections rather than settling it, both options are far more beneficial than ignoring the debt completely. You should give yourself credit for reaching the point at which you’re ready to face your debt and get rid of it. While it may take time and effort, the promise of being debt-free is a meaningful, and realistic, goal to pursue.
Read Also: Is Target Credit Card Good
This Weeks Question: I Have Nearly $20k In Credit Card Debt And $10k In Debt To A Previous Commercial Landlord Of Mine I Have Come Upon Roughly $30k For The Purpose Of Settling These Debts Whats The Best Way To Negotiate With The Credit Card Companies And Landlord To Settle My Debts
Coming up with the means to pay off your debts is not an easy feat. So, I commend you for doing so. There are several strategies to pay off your debts, one of them being debt settlements. Whenever you settle a debt with a lender, you and the lender come to an agreement in which the lender accepts payment toward the debt for less than its owed and considers the debt satisfied. Youll find that many lenders are usually open to negotiations if you approach them in the right way.
Negotiating a debt settlement frees you from the unpaid debt, saving you money in accrued interest and fees and avoiding potential legal actions against you. However, on the downside, settling a debt can hurt your credit score and have tax consequences. For example, if your lender forgives any part of your debt greater than $600, youll likely have to pay income taxes on that amount. So, talk it over with your accountant and carefully determine if this is the best move for you.
Tips for negotiating your settlement