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How Much Does Debt Settlement Affect Your Credit Score

Understanding Your Credit Report The Difference Between Settled And Satisfied

How Does Debt Consolidation Affect Your Credit Score?
  • Sharon McDougall –

When you look at your credit report, youll see various status codes marked against individual loans and other borrowing. These indicate the extent to which youve repaid your creditors, whether there were any defaults, and if the account has now been closed.

You may also have noticed that two codes sound fairly similar, and relate to debts which have been repaid settled and satisfied. So what do these codes mean, and whats the difference between them?

Can I Get Sued

Yes, this is a possibility based on the motives of each individual creditor but it is based on several factors and isnt as cut-and-dry as one would assume. Any reputable debt settlement firm will never put you into a program that lasts over 48 months. This greatly minimizes the risk as much as possible.

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.

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Does Debt Settlement Affect My Credit Score

How Does Debt Settlement Affect Your Credit Score?

Yes, you can expect that a debt settlement will negatively affect your credit score. Most reliable sources such as Experian.com, and indicate that if your credit score is 700 or higher, you should expect roughly a 150 point decrease in your credit score by settling a debt. If your credit score is 650 or lower, you should still expect your credit score to go down, but not as dramatically.

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Settled Debt Wrecks Credit Scores

Your credit score could continue to fall after a debt settlement agreement. Paying less than the original amount of debt will be reported to the credit bureaus as a debt settlement, which can stay on your credit report for up to seven years.

While a settlement is better for a credit score than having an account reported as unpaid, its almost as bad as having a bankruptcy.

Many debt relief companies want you to stop making monthly payments while they negotiate. They want the money youd use on payments to finance a separate account theyd use to settle your debt. Trouble is, all the late payments and missed payments will also hurt your credit score for years to come.

Alternatives To Debt Settlement

Michael Bovee, a debt settlement coach and a frequent critic of his industry , advises erasing your debt through Chapter 7 bankruptcy and starting again, if you have the option.

For borrowers who are overwhelmed by unsecured debt such as credit cards, consider how your options compare, like debt settlement vs Chapter 7 bankruptcy. A Chapter 7 bankruptcy is almost always a better option. Yes, a bankruptcy will sully your credit history for years, but the rebuilding process can begin immediately. Consultations with a bankruptcy attorney are typically free, though youll pay legal and filing fees if you choose this route.

If you can erase your debts in a Chapter 7 bankruptcy, thats a much better option than trying to negotiate settlements, says NerdWallet columnist Liz Weston, author of Your Credit Score and Deal With Your Debt. Only if Chapter 7 isnt an option you refuse to file for bankruptcy, or you can only qualify for a Chapter 13 repayment plan should you consider debt settlement.

If you dont qualify for a bankruptcy or dont want to file one, consider a debt management plan offered through a nonprofit . Going that route will not typically reduce the amount you must repay, but it may reduce your monthly payments by stretching them out or by reducing your interest rate. It will have less impact on your credit than either bankruptcy or a debt settlement.

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Debt Settlements Impact On Your Credit

The degree to which debt settlement will affect your credit depends almost entirely on the particulars of your situation. The more that your creditor writes off in settling your debt, the greater the negative impact on your credit score. Because of this, it is almost always wiser to get a professional debt settlement provider to negotiate on your behalf than to try and negotiate a debt settlement on your own. Your debt relief company will run the numbers and make sure that they are making the best possible offer for your credit score one that will satisfy your creditors but not leave you high and dry financially.

If you are having trouble making your debt payments, then you have likely already experienced the negative impact that late fees and charges have on your financial situation and debt total. You should also know that late payments themselves make you less attractive to potential creditors the longer you are past due on your debt. Although a debt settlement will not clear your credit report of late payment notices right away, it may keep you from incurring any more late payments on the debt that is presently past due.

How Debt Settlements Work

How Credit Score Goes Up While in a Debt Settlement Plan

As you know, your is a snapshot of your financial past and present. It displays the history of each of your accounts and loans, including the original terms of the loan agreement, the size of your outstanding balance compared with your credit limit, and whether payments were timely or skipped. Each late payment is recorded.

You can negotiate a debt settlement arrangement directly with your lender or seek the help of a debt settlement company. Through either route, you make an agreement to pay back just a portion of the outstanding debt. If the lender agrees, your debt is reported to the as “paid-settled.”

While this is better for your report than a charge-offit may even have a slightly positive impact if it erases severe delinquencyit does not bear the same meaning as a rating that indicates that the debt was “paid as agreed.”

The best-case scenario is to negotiate with your creditor ahead of time to have the account reported as “paid in full” . This does not hurt your credit score as much.

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Alternatives To Debt Relief Plans

If you’re feeling swamped with debt and are looking for other ways to relieve the pressure, there are a few other actions you can consider. These options are alternatives to debt relief and may be good first steps if you’re only having issues with one or two creditors, haven’t gotten to a point where you are completely overwhelmed with your debt, or think you’ll be able to manage your burden on your own. If you give these a try and feel that you need a more serious debt relief option, consider one of the more serious action plans listed above.

Work With A Reputable Credit Repair Company

If you suspect that there are mistakes on your credit report but are not sure how to address them, a trustworthy credit repair agency can help. These professionals are trained to find and remove negative misinformation from your report, which can immediately get you a lower interest rate.

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Consolidating Debt With A Balance Transfer

Balance transfers, in which credit card debt is transferred onto a lower-interest or zero-interest card, works if you have a good to excellent credit score, meaning 700 or better.

If you fall below 700, you may not qualify and if you do, it will likely end up costing you money in fees, a short time limit on the introductory rate and youll be back where you started. Or worse.

Why Debt Settlement Can Harm Your Credit Score

Debt settlement

When lenders agree to settle your debts, youll be paying off debts that have gone unpaid altogether or have been paid late. If thats the case, its likely your credit score has already dropped.

At least at the outset, a debt settlement that shows up on your credit report could cause your credit score to fall 100 points or more. typically range from 300 to 850. So, if you recently had a FICO credit score of 670, a new debt settlement on your credit report could pull your score down to 570. As a result, your FICO score might tumble from the good category to the fair category.

While debt settlement could cause your credit score to drop, its often only by about half the number of points as a bankruptcy might. For example, somebody who had a FICO score of 670 might see their score plummet to 470 after filing for bankruptcy. Bottom line: Debt settlement could make it easier to rebuild your credit than bankruptcy would.

Its important to remember how important a credit score is. A high credit score might make it simpler to qualify for a credit card or loan, and might enable you to obtain low interest rates and other favorable terms. On the other hand, a low credit score might make it harder for credit card companies to qualify you for a credit card or loan, and might result in high interest rates and other less favorable terms.

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You Could Still End Up Making Monthly Payments For Up To 4 Years

Debt settlement still requires money to make settlement offers. Creditors and collectors wont forgive your balances and get nothing in return you must pay them something. So, you need to generate money for a settlement.

Heres how to works:

  • You enroll in a settlement program through a debt settlement company.
  • They create a monthly set aside account to gather the funds you need to make the settlement offers.
  • You make monthly payments into set aside account to generate the funds you need for settlement this is called a monthly set aside.
  • Once you have enough funds, the company negotiates with your creditors and collectors to agree to a settlement.
  • As settlements are negotiated, they take funds out of the set-aside account.
  • So, youre still going to end up making monthly payments, even with a settlement program. And a settlement program can take anywhere from 12 to 48 months, depending on how much you owe and how much you can set aside each month.

    What if I dont have any money to make monthly payments?

    If youre wondering where you get the money to make the monthly set aside, it depends on the settlement company. Reputable companies will review your budget and help you cut back to generate the biggest monthly set aside possible. But some disreputable companies may advise you to stop making any payments to your creditors and use that money for the monthly set aside instead.

    Learn How Debt Settlement Affects Your Credit Score

    Debt settlement can be an appealing option to consumers struggling with high levels of credit card debt. Because it allows borrowers to pay less than the total amount they owe, they think theyre getting a better deal than if they had to pay off the debt in full. But what many dont realize is that settling debts can have major long-term implications on a persons credit. Heres the truth about how debt settlement can affect your credit score.

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    Settling An Account Is Better Than Not Paying At All

    Although settling an account is considered negative, it won’t hurt you as much as not paying at all. And, if you are planning on making a major purchase, such as buying a home, you may be required to either settle or pay in full any outstanding delinquent debts before you can qualify for a loan.

    If paying the debt in full is not an option, settling the account is typically more beneficial than letting it go delinquent or, worse, to default.

    Debt Negotiation Or Settlement

    Debt Consolidation & Management : Does Consolidating Credit Cards Hurt Your Credit?
    • Immediate Credit Impact: Severe damage
    • Long-Term Credit Impact: Slow recovery

    Some creditors are willing to allow you to settle your debt. Negotiating with creditors allows you to pay less than the full balance owed and close the account.

    Debt settlement companies negotiate with creditors on your behalf, but their tactics often require you to stop paying your bills entirely, which can have a severe negative impact on your credit score. In general, debt settlement is considered a last resort and many professionals recommend bankruptcy before debt settlement.

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    What Do The Debt Settlement Companys Fees Cover

    The fees paid to debt settlement companies are intended to compensate the company for its efforts and will only be refundable to the extent they have not been deemed to have been earned in the manner described in the Client Agreement. Debt settlement program fees are not being set aside or held in escrow to fund debt settlements.

    Is Debt Settlement Right For Me

    You may be wondering how other forms of debt relief such as debt management or bankruptcy would affect your credit score. These are great questions that should be explored. Ascend specializes in each of these debt-relief options, so if you take the debt settlement calculator and click “Analyst Review” at the end, we’d be happy to do a free review of how each of these options may impact your credit score.

    Regardless, before signing the dotted line for debt settlement, we would always recommend comparing each of your options holistically to make sure that you are getting into the right option. When we started Ascend, we realized that there were far too many people getting misplaced in the wrong debt relief option because they did not consider each of the options holistically beforehand.

    While you can get replaced in the right option, you may have spent a year or two years in the wrong option before moving over, making debt relief longer than it needs to be. Here are some recommended readings to help you understand what’s best for you:

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    What Happens To Your Credit Score After Debt Settlement

    After youre done settling your debt, your accounts will be closed and marked as settled. Some of these accounts may have already been closed by the lender in a charge-off.

    Settled accounts stay on your credit report for up to seven years from the time they were charged off. Debt buyers reporting their own negative entry on your credit should be removed at the same time that your original creditor is taken off.

    Settled accounts are somewhat negative on your credit because you didnt pay off the account in full or as originally promised. However, the older these debts get, the less weight they carry.

    If the accounts you are settling are older, they also could hurt your credit score. Thats because 15% of your FICO score is based on the length of your credit history, including the age of your oldest account. On the plus side, closing these accounts will lower the amount of your balances, which makes up 30 percent of your FICO score.

    The biggest factor in your credit score is your payment history, which accounts for 35%. Thats why missing payments hurts your score so much. But once you start making timely payments again, youll start rebuilding your credit. Settling a debt is usually considered better than not paying one at all.

    How Can Borrowers Deal With This

    How Debt Relief Affects Your Credit Score

    Borrowers may see ‘Write-off’ as an opportunity to pay less for the time being to close their loan account. However, most of the borrowers aren’t aware of the consequences of such a settlement. Until and unless you don’t have another option, do not get swayed by this option offered by the lenders. If possible, choose to liquidate your savings or investments to pay off the outstanding loan amount in full. Generally, it is recommended to consider settlement as a last resort.

    Apart from this, you can request your lender to extend your repayment term, re-evaluate the monthly instalment structure so it is easier for you to make monthly payments, reduce the interest rate, or at least waive-off the interest for as long as possible.

    Once your lender agrees with you, make sure to verify the changes that may happen on your credit report and score. Maintain a good credit score and behaviour and try to make up when you notice a dip in that. To further avoid such situations, you can go for a secured loan instead of going for an unsecured one so that the lender will not have to be worried about your repayment capabilities. Alternatively, you can also take an insurance policy against the loan. In this case, even if you come across a tough situation where you cannot repay, the insurance does the needful for you. Therefore, you will not default on payments and it wont affect your credit score.

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