Let’s say you’ve found yourself facing a stack of debt and you’re at a loss as to what to do about it. Your income is so overwhelmed; even the minimum payments have become a struggle to make.
Reviewing your options, you’ve run across a strategy known as debt settlement (also called debt relief). Intrigued by the possibility of resolving your obligations for less than you currently owe, you’re to learn more.
However, you’re also left with one nagging question.
Can debt settlement improve your credit score?
Or, asked more accurately, will it hurt your credit score?
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How Will Debt Settlement Affect Your Credit Score?
Your creditors file reports with each of the big three credit bureaus (Experian, Equifax and Transunion) each month. Among the information provided regarding the status of your accounts is whether your payments are on time or late. They also convey information regarding the amount of your payments. If you’re making minimum payments each month, that fact is duly noted and conveyed.
Additionally, your creditors inform the bureaus about the amount of the balances you owe, as well as when your accounts are paid off, unpaid, closed or settled. While closed settled is better than closed unpaid, it’s not as good as paid in full on time or paid as agreed.
So, said in the simplest terms possible, debt settlement will in fact lower your credit score. There’s no way around it. You’re paying people pennies on the dollar compared to what you actually owe. So no, they’re not going to write a love letter to the credit reporting agencies about you.
There ARE Other Factors to Consider Though
While your payment history IS one of the biggest factors when it comes to establishing your overall score, there are other elements to consider. These include the length of your credit history, how much you’ve borrowed against how much creditors are willing to loan you, the types of accounts you have and how recently you’ve applied for new credit.
If your payment history is shaky, but you’re solid in all of those other areas, your score won’t be affected as drastically. However, this too is a remote possibility, because if you’re in enough trouble to make settlement seem like a viable option, odds are you’ve slipped in one or two of those other areas as well.
Bankruptcy Can Be Much Worse
While enrollment in a debt settlement program will have the overall effect of lowering your credit score, it won’t decimate it the way filing for bankruptcy protection will do. For one thing, your creditors do get some money with settlement. Bankruptcy reduces the likelihood considerably.
This, in fact, is why so many creditors accept settlement agreements. They know the likelihood of getting paid in full (or even at all) out of a bankruptcy fund is unlikely. Maybe they will, maybe they won’t. Either way though, they know they seldom get all of their money.
A bankruptcy filing stays on your credit report for seven to ten years, depending upon the type of filing you make. A debt settlement can drop off much sooner.
But Wait, It Isn’t as Bad as It Sounds
While debt settlement might seem like an ending, it can just as readily be viewed as a beginning. Upon successfully completing a debt settlement program, your accounts will be paid off, even if not ideally. Some creditors will be likely to take a risk on you again — albeit at higher rates of interest. So, while the answer to the question can debt settlement improve your credit score is basically no; debt settlement can position you to rebuild your credit history more quickly than defaulting on your obligations altogether.
