Debt settlement can be a suitable solution to reduce your outstanding dues. The process of settling your debt involves contacting your creditors or taking the help of a settlement company to do the work for you. If you’re considering trying to settle your debt for less than what you originally owe, then this can cause havoc on your credit score. Since debt settlement involves the forgiveness of some of your past dues, these programs can severely hurt your credit score. However, there are situations when settlement does not ruin your credit score in anyway. Unfortunately, in these circumstances, your credit score has most likely already been damaged. Settling debts for less than the entire amount is good, but this will drop your credit score. Still, settlement is the best way to get back your finances at the right track.
How does debt settlement damage your credit score?
When you decide to settle your debts, this can damage your credit severely, particularly when your accounts are updated or there is minor delinquency, say about 30 to 45 days behind. Though your score reduction will be less damaged than a recorded “charge off” of the outstanding balance, the decline will be noteworthy. Your creditor loses the balance of the money that they loaned you. Future lenders will know that the creditors had no alternative apart from accepting the reduced amount.
When does debt settlement not affect your credit?
If your credit score is not extremely low to begin with, then a debt settlement may not be right for your situation. The only time when settling debt does not significantly affect your credit is when you’re already delinquent say 90 days or more, and your score has been destroyed. A settlement is much better than forcing your creditor to write off the full balance. However, a debt settlement will still lessen your credit score, so evaluate where your credit stands before you choose the settlement route.
How can you rebuild your credit with debt settlement?
It is not possible to speculate about the time it will take to repair your credit after using a debt settlement option. The calculations on credit score will use several factors in a complex mathematical algorithm to reach your number.
Suppose you had nine credit sources and you need to settle only three at less than full balance, then your credit score will improve much sooner than if you had to settle all nine creditors balance. However, your settlement results will stay on your credit report for up to seven years after the settlement date. Your creditors may willingly choose to mark your account as paid however, these cases are exceptional. Suppose, if you had nine credit sources and you need to settle only three at less than full balance, then your credit score will improve much sooner than if you had to settle all nine creditors balance. However, your settlement results will stay on your credit report for up to seven years after the settlement date. Your creditors may willingly choose to mark your account as paid however, these cases are exceptional.
What if your credit score is good, between 600 and 700?
When you choose debt settlement to settle your debt, then this will negatively affect your credit score. According to Debt Steps, the debtors should include only the most relentlessly past due or most damaging items on their credit reports so as to be most effective. A low percentage of creditors in this program will reduce the negative impact.
What happens when your score is 600 or less?
If your debt settlement program gets completed successfully, then you’ll have negligible impact on credit score. However, if your credit score is low due to late mortgage payments, revolving credit card dues, medical bills, then filing for bankruptcy can provide you a quick solution. You can then work on repairing your credit after your bankruptcy.
Some consumers think that settling your debt is a great way to eliminate debt problems. While debt settlement can eradicate some of the debts you owe, it is considered unfavorable by your creditors. This is because the program is going to harm your credit score in nearly all instances. It is suggested that you speak with your counselor or financial adviser before you decide to settle any outstanding credit debt your may have.