Dealing with any kind of past due debts can prove to be difficult. If you cannot afford to pay the amount in full, you can always negotiate for a lower sum payment or debt settlement with the creditor. Debt settlement generally means you will get into an agreement with creditors for paying less than stated balance, to satisfy your debt. But, when you settle the debt that’s on credit report, it might affect the score a bit. You can rebuild your credit score after a bankruptcy, but it’s way easier to follow next steps.
More about debt settlements:
As creditors are unwilling to settle debts, which are serviced with time payments, you are always better trying to work the deal with some past due older debt. It is somewhat, which has been turned over to the collections department. It is counter-intuitive, but score drops less when you want to be delinquent in payments.
- You can always negotiate debt settlement arrangements directly with a lender or just seek the help of a debt settlement firm. Through either one of the route, you can always make an agreement to repay the only portion of the outstanding debt.
- In case the lender agrees, your debt is then reported to credit bureaus as paid settled. Even though this is better for the report than charge off, it will not bear the same old meaning as the rating that indicates your debt has been paid as agreed.
- In the best case practice, you have to negotiate with creditor way ahead of time to have this account of “paid in full.” This is not going to hurt the credit score as much as you want.
How debt settlement affects credit score:
Most of the loan obligations and credits are highly reported to credit bureaus each month. The account status you have will be reported to show the status of either “paid settled” or “settled.” While a settled status is a bit better than the unpaid one, any status other than “paid as agreed” or “in full” will hurt your credit score in the end.
It is mainly because you are not paying full balance as agreed. So, debt settlement seems to have a negative impact on credit score. The credit is solely based on various different factors. So, the exact impact on credit is subject to vary, depending on other information on a current credit report. However, it is hard to state whether debt settlement will have a significant impact on credit score or not.
Things mentioned by FICO about settlement and credit score:
There are some credit scoring companies, which are not going to give specified details about ways in which credit scores will be calculated or the specified activities, which might affect the credit score of a person. But, there is one point you will know.
- In the year 2009, FICO released score loss information, which is solely based on two of the hypothetical consumers with various credit scores. In one case, the person with around 680 credit score would lose between 45 and 65 points after a settlement is covered for one credit card.
- Then you have another person with 780 credit score and without any late payments, which might lose between 140 and 160 points. Your credit score might drop if you have any of the credit profile like the mentioned cases and when you are settling a single debt. If you are settling on multiple accounts, the score will drop a bit more.
- You can easily predict the impact of late payment on credit score, with the help of the FICO Score Simulator. It is available whenever you purchase the Score Watch from the authentic sources only.
Late payments before the debt settlement procedure:
Debt settlement will easily hurt credit score more if the cards you are settling for already is in good standing and when you are looking for ways to settle multiple card account. There are multiple debt settlement firms, which will advise you to fall purposely behind payments to force the creditors to accept settlement payment on a debt. Lenders, on the other hand, will only settle debts which are at risk of never getting repaid. If you end up following the debt company’s advice, it means you will miss several months of not paying the lenders. This step, in turn, will hurt credit score even before you get to settle a debt.
Debt settlement based information is designed to remain on credit report for 7 years. But, those will have less impact on credit score as the information gets older. It will also change with some positive information adding up to your report.
Some major points to consider:
If you really want to know how debt settlement can affect credit score rating, you might want to catch up with debt settlement reviews for some help. The information provided will help you find some answers, even though the majority of it is covered already. However, there are some important points, which you need to consider.
- Remember that settling multiple accounts will hurt you even more than settling only one account.
- As with debts, larger balances will have a proportionately larger impact on credit score. In case, you are settling smaller accounts then the impact will be rather negligible. It is applicable if you are currently dealing with bigger loans.
- If you are dealing with debt as old as 3 years, then using debt settlement might reactivate debt and will show the service on credit report as a current collection. So, always be sure to get this matter straight with the creditor before even finalizing any agreement.
- In credit history, the most important part is the payment history where current accounts will hold the highest impact. If you are currently working on other debts, you must keep the present one in proper shape. That will make rectification a lot easier.
- Debt settlement will be on credit report for 7 years. If it took place over 7 years ago and still showing on the report, you have to contact the lender and credit bureau to change the record and remove settlement status.
Remember to keep these points in mind before working with debt settlement firms. Gaining some knowledge beforehand will work for your credit report.