A lot of my readers specifically ask me on how debt settlement actually affects your credit score. Before we even decide to answer this question, we need to take a step back and understand how debt settlement even works.
Debt Settlement Will Have a Devastating Affect
The reason why debt settlement programs hurt your credit score is because lenders won’t settle and negotiate on an account unless you’re behind on your payments. After all, they really have no incentive to negotiate if you’re paying them on time every month right? Under no circumstances should you intentionally fall behind on your payments just so you can negotiate and settle your account, here’s why:
1) There’s NO guarantee- There’s no guarantee that a creditor will settle with you. There’s no universal rule that they have to negotiate a balance for less than what you owe. Technically, they can take your account straight into their legal department and just decide to sue you instead. Although there’s really no reason for them not to negotiate, there’s nothing that says that they have to settle with you.
2) Credit Ruined- Hopefully you’re considering a debt settlement program because you’re already 3+ months behind on your accounts, and can’t afford payments on a Debt Management Plan. If this is the case, you’re credit score probably already took a hit. If you’re not behind on your payments, your credit score WILL take a hit, and definitely have the possibility of collection accounts appearing on your credit report.
3) Listed as “settled for less than full balance” – If you are able reach a settlement on your account, there will be a notation on your credit report stating that the balance was settled for less than the full balance. This can be frowned upon when you try to apply for financing.
4) Increased Collection Calls- Once you fall behind on your payments, you will face an increase in collection calls from creditors and collection agencies. You will probably get at least a few collection calls per day, and it can really get annoying.
There are other options!
If you’re considering a debt settlement program, it’s important to look at other options first before you decide to pull the trigger. Dealing with an overwhelming amount of debt can be stressful, and can lead you to make poor financial decisions.
1) Talk to your creditor- Most creditors has internal hardship programs where they will lower your interest rate and payments to something more affordable. These credit card repayment plans will allow you to be placed on either a short term or long term plan to get out of debt.
2) Enroll in a DMP (Debt Management Plan) – If you can’t get your creditors to work out a repayment plan with you, talk to a credit counselor and explore the options of a DMP. Credit counselors have special concessions with most of the creditors, and should be able to put you on a structured payment plan.
I believe debt settlement is an effective solution to some people. There’s really no “one size fits” all when it comes to paying down your debts. Part of getting rid of debt also involves budgeting and to spend money wisely. The most important aspect is to see which program fits your financial circumstances, to take action before it’s too late.