Debt settlement, as the name suggests, is the process to settle your debts with the creditors. Here, both the creditor and debtor agree on the reduced balance - which is considered as the full payment made by the debtor.
In a debt settlement program, an organization or a third party negotiates with the creditor or credit unions on your behalf and reduce the principal debt amount which you owe.
Debt Settlement Traits
It provides you with the following options to wipe off your debts:
- Minimizes your principal debt amount,
- Removes your late fees,
- Provides you flexibility to pay off debts within your chosen time.
Thus, helps to lessen your original debt amount by a certain percentage.
Impact of Debt Settlement on your Credit Score
Q: Why a good credit score is so important?
A: A Good Score = Money In Your Pocket.
Explanation: A good credit score is a vital attribute for every individual. It is easy to get a loan approval with a good credit score. Thus, if you have more money in your pocket and if you use it in the best possible way, then it will help you to pay bills on time, which in turn will increase your score.
Credit Score Importance
Credit Score is one assessment scale which different companies and individuals consider before doing business with you because it showcases your creditworthiness. Just as a thermometer measures your physical health, a credit meter measures your financial health (your creditworthiness). It analyzes a person’s financial background and his/her position in the financial market.
Will debt negotiation hurt your credit score?
Are you irregular towards your bill payments? Or are you taking the help of debt settlement company to settle your debts? If yes, then be ready to face the consequences of a bad credit score. As soon as you go for debt settlement, this proves that you are not a person to be trusted with finances, which hampers your credit score to a great extent.
The National Foundation for Credit Counseling (NFCC) warns that your credit score may dribble between 65 to 125 points as a result of this type of program. This happens because, you fail to make the payments to the creditors within the given time period. When you take help of debt settlement and clear your dues, your accounts are reported as “paid by settlement”. This makes you look less dependable to future lenders.
The longer your balances are kept unpaid, the more damage is done to your score. After debt settlement program is complete, you can take certain steps to improve your score over time. But these steps does not fully repair the damage of your score which got affected when your accounts went unpaid. Thus, undoing the damages won’t bring back your original credit position.
Q: What does happen to a new account when debt settlement is carried on?
A: Debt settlement of a new account = Serious damage to credit score.
Explanation: This is so because, when you sign the credit agreement, you have agreed to pay the total amount of your debt. Now when you are unable to pay the said amount, your score drops, which means you are not creditworthy. In a debt settlement program, only a part of the whole balance is paid, giving a blow to the lender’s money.
Debt settlement - Why should you apply?
From the above discussion, it is clear that debt settlement damages credit score. Now, the question which strikes you - if it is so, then why should you go for it? Well, it has some benefits attached which makes it applicable. Here it goes:
- It helps you to escape creditor harassment.
- Through a debt settlement program you are able to save your dollars, as you are paying a part of the outstanding balance to the collection agencies.
- It will eliminate your debts in 2 to 4 years.
- It gives you the freedom to choose your own settlement terms.
- All your financial records are kept confidential.
- Under a debt settlement program, you just have to make one affordable monthly payment instead of multiple payments.
- Debt settlement gives you the chance to rebuild your score once you take certain steps after your dues are paid off.
- It is the best option for those with large amount of unsecured debts.
- Debt settlement helps to avoid asset liquidation through bankruptcy.
- Finally, with a DSP you become a debt free person.
End Result
In spite of having the above benefits, it cannot be ignored that debt settlement injures credit score. This negative marking is reflected on your credit report for the next 7 years. Whatever the fact is, consumers still go for debt settlement. The probability of getting harassed at the hands of the creditors is less throughout the process of negotiations. A debt settlement program though not appropriate for your credit score, is seen as a great start to financial recovery.