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How Will Debt Settlement Affect My Credit Rating?

Debt settlement usually has a negative impact on your credit rating. The negative impact depends on many factors: the current state of your credit, your reporting practices, creditors, the size of the debts being settled, whether your other debts are in good standing, how much less than the initial balance for which the debt is settled, and a host of other variables.

Key points to remember

  • While debt settlement may be the best option for eliminating past due obligations, it can negatively impact your credit score.
  • Ironically, stronger credit scores are harder to settle through debt settlement than poorer ones.
  • The best type of debt to settle is a single large debt that is one to three years past due.
  • Don’t try to pay off debt at the cost of falling behind on your other obligations.

Why debt settlement can hurt your credit score

Why would that have a negative impact, when you ease the burden of your obligations and your creditors get the money? Because strong credit scores are designed to reward accounts that were paid on time according to the original credit agreement before they are closed.

A debt settlement plan, in which you agree to repay a portion of your unpaid debt, modifies or cancels the original credit agreement. When the lender Closes the account due to a change in the original contract (as is often the case after settlement is complete), your score is lowered. Other lenders will likely take note and be wary of giving you credit in the future as well.

Nonetheless, it is possible that reducing the debt burden will lead to a subsequent drop in your credit score. The top credit card account balances and late or missed payments have probably already reduced it somewhat. If debt settlement is the path to a healthier financial future for you, this should be considered.

Let’s take a look at the process in more detail.

Will Paying Off Your Old Debt Increase Your Credit Score?

How Debt Settlements Work

As you know, your credit report is a snapshot of your financial past and your present. It shows the history of each of your accounts and loans, including the original terms of the loan agreement, your outstanding balance amount against your credit limit, and whether payments were made on time or on time. no. Each late payment is recorded.

You can negotiate a debt settlement agreement directly with your lender or seek help from a debt settlement company. Either way, you agree to only repay a portion of the outstanding debt. If the lender agrees, your debt is reported to credit bureaus as “payment paid”.

Although this is better for your report than a to cushion-it may even have a slightly positive impact if it erases delinquency– it does not have the same meaning as a note indicating that the debt has been “paid as agreed”.

The best case is to negotiate in advance with your creditor so that the account is declared “paid in full” (even if it is not). It doesn’t hurt your credit score as much.

What kind of debt do I have to pay off?

Since most creditors are unwilling to settle debts that are up to date and serviced with timely payments, you had better try and come to an agreement for older and seriously overdue debts, perhaps something that has already been taken to a collection service. It sounds counterintuitive, but in general your credit score drops less as you become more delinquent in your life. Payments.

However, keep in mind that if you have an unpaid debt that was sent to collectors over three years ago, paying it off through debt settlement could reactivate the debt and make it appear like a running collection. Make sure you understand your creditor before finalizing any deal.

A debt settlement stays on your credit report for seven years.

As with all debt, larger balances have a proportionately greater impact on your credit score. If you are settling small accounts, especially if you are aware of other larger accounts ready—Then the impact of a debt settlement may be negligible. Plus, settling multiple accounts hurts your score more than settling just one.

Debt Settlement vs Staying Up to Date

In your credit history, the most important weight is given to the history of payments, the current accounts having the most impact.If you are behind on other debts, it’s important to try to keep a newer one first. current account in good standing before attempting to rectify a long overdue account.

For example, if you have a car loan, mortgage, and three credit cards, and one of them is over 90 days past due, don’t try to settle that debt at the expense of other obligations. An unpaid account is better than having late payments on multiple accounts.

30%

The average amount of savings a consumer sees after debt settlement, according to the American Fair Credit Council.

It will also seem counterintuitive, but the stronger your credit score is in front of you. negotiate a debt settlement, the greater the fall. The Fair Isaac Corporation, the group behind the FICO score (the most common type of credit score) gives a scenario where a person with a credit score of 680 (who is already overdue on the credit card) would lose between 45 and 65 points after the payment is settled. debt for a credit card, while a person with a credit score of 780 (with no other late payments) would lose between 140 and 160 points.

The bottom line

Focused towards suffering debt can be scary, and you may want to do whatever you can to get out of it. In this situation, a debt settlement arrangement seems to be an attractive option. From a lender’s perspective, it may be better to arrange for payment of some, but not all, of the outstanding debt than to receive none. For you, a debt settlement has an impact on your credit report, but it can help you fix problems and rebuild.

Take into account opportunity cost not to pay off your debt. If you don’t settle for it, your score isn’t affected right away. However, non-payment can lead to late payments, defaults and collection attempts by credit agencies. These scenarios can end up hurting your score further in the long run. Occasionally, debt relief is the best option, but a clean slate is almost always good.

Think about taxes. The IRS generally considers the forgiven or forgiven debt as taxable income.Ask your tax advisor about the possible tax implications of a debt settlement.


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