The common myth is that a debt settlement has no effect on a debtor’s credit score. Contrary to the myth surrounding debt settlement, debt settlement may affect your credit score. However, the impact may be negative or positive, depending on various conditions that may be in the present or future instances. Your credit score reflects if you have paid the debt owed as per the original agreement with your lender.
A debt settlement, on the other hand, negates or modifies the credit agreement. Therefore, this will possibly affect your credit score and a potential creditor will take note of the accounts that were closed by your previous creditor closed an account due to such changes brought about by debt settlement. The following are some of the factors that influence the impact that debt settlement has on your credit score:
- the present condition of your credit
- your creditor(s)’ reporting practices
- the amount of debt being settled
- if your settled debts are in good standing at that moment
- reduced amount by which the original balance of the debt was settled for.
However, in some instances, it will be beneficial to settle your debts. This is when you factor in the opportunity cost of not having debt settlement and having your credit score affected. An example of this is when you have a situation in which you continuously submit payments late or default on the payments.
Therefore, it would be better to have a debt settlement company assist you in sorting your financial issues as not doing so in the present will lead to a bad credit score in the future. Debt settlement programs aim to reduce the amount of debt attached to your name and in so doing, this will be able to assist you if your credit score is already lowered due to late payments. Settlement of debts may be the much-needed relief that you will need to manage your finances.
A point to note is that debt settlement is suitable for large amounts of debt. This is because the larger amounts of debt have a greater impact on your credit score. If you settle the smaller amounts of debt when you have a larger amount of debt, this debt settlement will negligibly affect your credit score.
Therefore, when you feel that you are stuck in your finances and would like to improve your credit score, you will need to consider the factors that influence the impact that debt settlement has on your credit score as well as the opportunity cost of not having a debt settlement program. At times, it would be better to have your consumer credit report reflect a debit account as ‘paid-settled’, especially if this will do away with severe delinquency.