How Much Does Debt Settlement Affect Your Credit Score?
If you’re in debt and already behind on payments, debt settlement is a viable option to save you money and help you get a fresh start. But as with debt consolidation, debt management plans, and bankruptcy, it’s natural to wonder how settling your debt may affect your credit score. As you consider all of your options, here’s what you need to know about the debt settlement credit score impact.
What Is Debt Settlement?
Debt settlement is the process of negotiating a lower payment than what you owe on unsecured debts. The process can take several months or even years, but the financial benefits can go beyond your credit score and make it easier to breathe easily again.
What’s more, working with a debt settlement firm to resolve your debt can minimize the impact of the settlement process on your credit score and the credit reporting by your creditors.
In many cases, you’ll stop making payments on to your credit card company during the debt settlement process. When working with a debt resolution law firm, you’ll make payments into a settlement account, which the firm will use to negotiate with the creditor once the balance is enough to do so.
If the lender agrees, you’ll settle for less than what you owe and can move on without the burden of that debt. But while debt settlement can be a good move, it’s important to know about its impact on your credit.
How Does Debt Settlement Affect Your Credit Score?
First, it’s important to understand that your credit score can go down whether you participate in a debt settlement program or not. In fact, if you’re already behind on payments, much of the damage may have already been done.
Because you may have to stop making your payments on your credit cards, debt settlement results in a temporary negative impact to your score. But if your credit score isn’t that high because you’re already behind or for other reasons, the drop due to the debt settlement process may not be very dramatic.
Additionally, settled accounts will remain on your credit report for seven years from the original delinquency date. This means that your credit history could be impacted by your decision to settle for many years to come. However, credit scoring models favor new information over old, so if you can manage to develop good credit behaviors going forward, the good can outweigh the bad.
Unfortunately, it’s impossible to say exactly how debt settlement will impact your credit score because there are a lot of different factors that go into a credit score, including:
- how much credit card debt you have
- what your payment history is like
- how high your credit limit is across all of your credit cards
- the total of each credit card balance
- what information each of the three credit bureaus has about your credit profile
- how much outstanding debt you have
- how long you’ve missed making monthly payments
Everyone’s credit score is different. For one person, debt settlement could just cause a fluctuation of a few points, and for another, it could be 20 points or more. But in the end, you will be out of debt and into cash flow positive, which is the big-picture goal for personal finance management.
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.
The Bottom Line
Debt settlement is never ideal, but if your situation is dire, it could be the best path forward to getting back on the right track financially. In this scenario, it may be good to view your credit score as secondary to your overall financial health.
Leaving your debts as-is can result in credit card balances growing until you max out your credit cards (or are close), which will have a negative effect on your score. Even if you take out debt consolidation loans, all debt comes with interest charges and can keep you stuck for many years. Even a balance transfer credit card—another option for dealing with debt—could hit you with high interest if you don’t pay off the balance before your 0% interest period ends.
Debt settlement may cause your credit score to decrease for a period of time, but it can alleviate cash flow so your budget isn’t so tight. A good debt management plan can make it easier to establish healthy credit habits in the future, which can have a positive impact on your finances long term.
Entering a debt settlement law firm program like Tayne Law Group’s can help you resolve your debts. What’s more, it can also help you learn to be less dependent on credit cards and loans and more dependent on budgeting and realistic money management. This way, when you finish the program, your credit score will restore itself naturally over time and will stay that way because you are no longer relying on credit cards and other forms of consumer debt.
The team at Tayne Law Group, P.C. is here for you. Our solutions are tailored to your specific situation and can help you navigate the debt settlement process. Call us for a free consultation at 866-890-7337 or fill out our short contact form and we’ll get in touch!