The Truth about
Debt Settlement and Your Credit
Misinformation about credit and an incomplete understanding of debt settlement can muddle facts about how this debt relief option can affect your credit score. Fortunately, as consumers learn more about their credit score, and its influence on their financial lives, they want to know how debt settlement could affect it. Financial education and awareness can build a better understanding of the real correlation between debt settlement and your credit.
Debt settlement can be a viable debt relief option for people who cannot manage to repay their debts and are looking for and alternative to bankruptcy. Many people who qualify for debt settlement already have poor credit because they are, or are about to, fall behind in their payments. For people who have maintained good credit, debt settlement can be damaging. After missing one or more monthly payments, creditors may send your account to their collections department or a third-party collection agency, if they haven't already, and they will report to the credit bureaus that you are missing payments. In addition, missing around 6 consecutive months of payments may result in charge-offs also being notated on your credit report, which too is damaging to your credit score. Settlements may be reflected on your credit report as “settled for less than the full amount” or something similar. It is important to understand your credit will be negatively affected before enrolling in a debt settlement program.
But perspective is important. Here are some points to consider:
- If you are behind on payments to your creditors, your credit is likely already damaged.
- You may be able to get out of debt faster with debt settlement than with credit counseling.
- If you are truly in financial distress, your credit may suffer with or without debt settlement.
- As with debt settlement, other debt relief options can also have an affect on your credit or your ability to obtain loans.
If you have great credit and the ability to pay off your debts, you are probably not qualified for a debt settlement program. Otherwise, take a look at the larger picture to balance your desire for good credit and your need to reduce your outstanding debt.
Some people may have specific reasons for avoiding damage to their credit. For example, if you are planning to buy a home in the near future, damaged credit could interfere with your plans. The bottom line is to decide what's more important: maintaining decent credit with the ability to obtain loans and additional credit, or, attempting to settle your current unsecured debt.
Delinquencies, charge-offs and other negative credit notations may remain on your credit report for up to 7 years. Depending on your situation and your goals, temporary damage to your credit may be worth it to get out of debt.
If your credit is your only concern, you may want to consider the bigger picture before you completely rule out debt settlement as a debt relief option. Your present and potential credit standing and your overall debt situation must all be considered before you commit to any debt relief option.
If you have questions about debt settlement, you can learn more about the process and learn whether it's the right solution for you. Contact us today for your free debt analysis.
