Debt Settlement and Credit Score

Today's less than stellar economy has many individuals looking for ways to pay off their debts, or at the very least greatly reduce them so the money that comes in on pay might actually be saved or enjoyed versus just passing through one's bank account. Ads strewn throughout the media have also begun heavily advertising some relatively new options at accomplishing these goals. Whether it is through a debt settlement company or dealing with the creditors directly, the settling of one's debt has become a very popular option.

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It is important to realize however, that the settling of a debt is not walking away from the remaining balance without penalty. Although the remaining unpaid debt may no longer be due from the borrower, most lenders will report the balance as "settled" on the borrower's credit for a time period of up to 7 years.

In addition to having a debt settlement on one's credit, their individual credit score may suffer a negative impact from delinquencies reported prior to the actual settlement. On the other hand, if someone has positive credit history, but has a lot of debt, this may be dragging down their credit score. The amount you owe is 30% of your credit score and debt settlement will have a significant positive impact on this portion because it results in your balances being satisfied quickly.. A word of caution though: if one has good credit and is looking to make a major purchase that will require a loan such as a home, they may want to explore other options to avoid the short-range impact settling their debt may have.

For those with average or bad credit, the impact to their credit score from debt settlement will also be negative, but in most scenarios those credit scores are average or bad due to the weight that additional debit is placing on the credit score itself. With these two types of individuals, to get out from under that financial strain, settling their debt may actually be a better option that trying to struggle through it.

Ultimately, whereas the ideal option is to pay back the borrowed money, there are situations in life where that may not always be feasible. In those scenarios, it is good to realize there are options out there, and although they may initially have a negative impact, the long-range outlook may be much brighter because of it.