How Debt Settlement Affects Credit

By Andrew Cocks And Terry Zambri

So you are considering debt settlement but are worried about the effects that it may have on your credit scores. It is true that debt settlement will have some short-term negative effects on your credit scores but at the same time, it is also likely to help you regain control of your finances in the long run. In order to have a better understanding of the entire process, it is very important to have a thorough knowledge of the following:

How Credit Scores Work

The factors that make up your credit score are length of your credit history, your new credit, type of credit used, payment history, and amount owed. The last two factors- payment history and amount owed have the biggest impact on your scores and influence debt settlement as well.

Your payment history has a major role to play while going through debt settlement. It bares the records of all the payments that you have made over the months, which include both on time, and late payments. In case you had skipped your payment for a particular month, that will also appear on your payment history. This is exactly where and why your credit scores get affected in case of debt settlement.

What Debt Settlement Is and How the Process Works

Debt settlement is a kind of grant offered to individuals going through major financial distress and are unable to pay off their debts. Here the creditor and the debtor both come together and settle on a particular amount which is less than the principal amount borrowed by the debtor initially. Although, it entirely depends on the creditors whether they want to agree on a settlement plan or not, but hiring a professional may help you reduce your debts to a certain extent. However, applying for debt settlement may cut down your payments by 40-60%, helping you come out of your debts keeping your dignity intact.

Of course, it is less likely to happen that a creditor may agree on some kind of debt settlement unless and until your account is either past or close to its charge off period. This shows in your payment history and is the very reason why your credit scores are negatively affected in the initial stages of your debt settlement process. However, the most interesting thing about payment history is that, it shows only the payment records of the last two years. So, although your scores may be lowered in the beginning but can be set right provided you continue making regular payments.

Another big factor that can affect your credit scores are the amounts that you owe. In case you have a huge bad debt and credit card debts, then it is quite obvious to negatively affect your scores. Under such situations, debt settlement can help you take a sigh of relief.

Debts are like quick sand, once you are on it you keep going down unless you have something to hold on to or someone to pull you out. In a situation like this debt settlement acts as that pillar that can help you come out of financial distress.

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How Debt Settlement Affects Credit

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