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Debt Settlement and Credit Scores

Created: On April 7, 2009 @ 3:06 pm In

Critics of the debt settlement process and industry often like to point out that debt settlement will do tremendous damage to your credit history and credit score. They cite this as one of the main reasons to explore other options. Unfortunately, for many consumers, the alternatives can be just as damaging or leave them stuck with their debt for years.

How does debt settlement impact one’s credit score?

[1] Debt settlement can have a negative impact on your credit in two ways.

First is the reporting of late payments. In most cases, a creditor will not agree to settle an account for less than what is owed until they believe they are at risk of not receiving any money. The most obvious indication of that risk is when you begin to miss payments. Missed payments are reported as 30-day, 60-day, and 90-day late payments. Each lowers your credit score.

Second is the reporting of the account as having been settled. While the account may be closed with no outstanding balance after having been settled, it still reports the fact that the account was settled for less than what was owed. The credit scoring models include this notation in their calculation, suppressing your score further.

Should you care?

The impact of [2] debt settlement on your credit score is largely dependent on whether you’ve already fallen behind on your payments and the current makeup of your credit.  Many consumers who move forward with debt settlement have already begun to miss payments, have maxed out many of their credit lines, and have seen much of the damage already done.

Settling of Collection Accounts

Late payments may not be an issue if you are attempting to settle on an account that has already been assigned to a collection agency. Depending on the age of the account, settling the account may result in the date of last activity being updated. When that happens, the credit scoring model views the collection account as being more “recent” than it really is. The impact of items on your credit report decline over time. Making something more recent will cause it to have a larger impact. In the case of a recently settled collection account, you will see your credit scores drop initially. As time passes, they will begin to recover.

Negotiate Your Payment History

The debt settlement process is a negotiation. There is nothing preventing you from attempting to negotiate how your payment history will be reported to the credit bureaus.  A creditor may agree to not report previous late payments or to report the account as paid after it has been settled. Collection agencies may be willing to delete the collection from your report or not verify it should you choose to dispute with the credit bureaus. There are no guarantees, and favorable reporting of settled accounts should not be counted on, however, there is no crime in asking.

Good Credit or No Debt?

For most consumers, it will ultimately come down to a question of what is more important to them. If you were to fast forward three years, would you prefer to have a higher credit score but still be struggling to make your minimum payments or damaged credit with virtually no consumer debt? Very rarely can a consumer successfully settle their debts while maintain a good credit standing.

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

Article printed from DebtHelp.com Blog: http://www.debthelp.com/blog

URL to article: http://www.debthelp.com/blog/2009/04/07/debt-settlement-and-credit-scores/

URLs in this post:
[1] Debt settlement: http://www.debthelp.com/debt-consolidation/settlement.html
[2] debt settlement: http://www.debthelp.com/blog/2009/03/17/two-must-dos-before-eliminating-credit-card-debt/