Debt settlement affects your credit for up to 7 years, lowering your credit score by as much as 100 points initially and then having less of an effect as time goes on. The events that typically lead up to debt settlement will affect your credit score, too. Most creditors will not consider debt settlement until the debt holder is severely delinquent on payment or already in default. Missing payments and then defaulting, or charging-off, on debt can cause your credit score to drop by as much as 110 points even before debt settlement negotiations begin.
In other words, the extent to which debt settlement will impact your credit standing depends in large part on your current payment status:
How Debt Settlement Affects Your Credit If You’ve Defaulted
If you have fallen more than 180 days behind on your credit card payments, your account has already been classified as being in default on your major credit reports. By that time, you’ve already suffered a lot of credit-score damage, so you won’t risk much by pursuing debt settlement.
“It seems that many consumers enter into a settlement for a debt with a naive assumption that it will erase negative information on the credit report,” says L. Douglas Smith, director of the Center for Business and Industrial Studies at the University of Missouri – St. Louis. “They need to understand the periods that negative information can remain in the file.”
The record of your difficulties will remain on your major credit reports for seven years from the date you defaulted. And given that your payment history accounts for 35% of your credit score, the hit that your credit standing takes will be significant.
While debt settlement won’t minimize credit score damage at this juncture, it could help you save money if a creditor or debt collector is willing to forgive a portion of your debt as well as certain fees and finance charges in exchange for a lump-sum payment for the remainder of what you owe.
Your options are therefore to try to reach a debt settlement agreement on your own or to see what a reputable debt settlement service has to offer.
At this point, you might be asking yourself why it’s even worth submitting a payment at all. There are two reasons: 1) It’s the right thing to do; and 2) It eliminates the threat of a lawsuit.
How Debt Settlement Affects Your Credit If You’re Delinquent
If you’re 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. That’s an extremely important contradiction because while debt “repair” services often promise delinquent consumers miracle fixes, they’re 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.
How Debt Settlement Affects Your Credit If You Haven’t Missed Payments But Still Owe a Lot
The best thing that you can do when faced with significant amounts of credit card debt is avoid missing any monthly payments. That doesn’t mean you have to pay your full balance right away, but rather that you must submit at least the minimum payment required by the due date each month. As long as you do so, your account will be classified as “Paid” on your major credit reports and you will not incur any credit score damage.
Your main objective at this point – aside from continuing to make monthly minimum payments – will be to chip away at amounts owed. Unfortunately, the only way to do so without experiencing credit score damage is to devise a strict budget with the aid of a credit card calculator and to perhaps use a 0% balance transfer credit card.
If you are willing to sustain some credit score damage in the short term, establishing a debt management plan with a non-profit organization could be a viable option as well, as the credit score ramifications will be far less severe than if you default and try to reach a debt settlement agreement. You should therefore put any thoughts of debt settlement out of your mind.
At the end of the day, you can only rely on debt settlement as a solution to your financial woes if your credit has already been destroyed. If that’s not the case, you should consider other options that might not only minimize the credit score damage that can result from significant debt, but that will also reduce your chances of being sued for amounts owed.