Settling on an account may slightly improve your credit score, but it will be far below where it should be had you paid the account off in full. Furthermore, if you used a debt settlement company, then the impact of any settlement will be greatly offset by the legal action that you will likely face from your other creditors.
How Does a Settlement Affect Your Credit Score?
The impact of a single settlement depends greatly on the other items on your credit report. To use one example, a person with 3 credit cards that is current on all accounts may have a credit score of 650-850. This of course assumes that there are no late payments on record within the past 7 years.
If that person decides to stop paying on one of those accounts and lets it go into default, that person’s credit score just dropped by over 100 points. They could be looking at 550-650 as a likely range for their credit scores. That takes into account the charge-off and assignment with a collection agency.
A settlement on the account may cause their scores to increase about 15 points, pushing it into a likely range of 565-665. Keep in mind that this still assumes that the person keeps their other 2 credit card accounts current. If they fall behind on those, their credit scores will easily drop below 530.
Debt Settlement Companies Cannot Stop Legal Action
One reason why debt settlement company clients experience such difficulties is that the frequently face judgments and possible garnishments from creditors even though they are enrolled in a debt settlement plan. Debt settlement companies do not protect their clients from legal action.
Debt settlement may even encourage lawsuits! A creditor that knows that you are pooling hundreds or thousands of dollars with a debt settlement company understands that they may be able to get paid before any of your other creditors by taking you to court. If they do, they can win a judgment for the full amount plus all of the accumulated interest and fees that have been added into the original principal balance.
You also are another $1500 or more further in debt when you sign with a debt settlement company. Their fees are generally paid first, which means none of your creditors receive any money. It could be 4-5 months before you ever begin accumulating a balance with them since they keep claiming their fees on the front end of your plan.
Public Records
A judgment is a court order to repay a debt. It is recorded at the courthouse, and it is reported to your credit bureaus as a public record. These actions are listed separately in addition to the original debt and any debt collector(s) that the debt is sold to.
Someone that has multiple creditor account should understand that settlement is rarely the best option. In addition, their credit scores will not greatly benefit from a settlement even if they are successful in closing the account.
If you are considering debt repayment options and are not sure where to turn, you should start with a nonprofit credit counseling organization to see what your options really are. They will help you evaluate your situation and answer your financial questions. That way, you will know how to proceed based on your own understanding of the options.
Tags: debt settlement effect on credit, how does debt settlement affect credit
I renegotiated by finance fee only with Bank of America. I did not reduce my debt, but the finance fee was I think 26.9 percent. I was not able to keep up with the payments with that high of an interest rate. My business is real estate, and had decreased significantly. I have automatic drafts every month, and will have them paid in 4.5 years. How will this affect my credit score? If I find a way to pay them off, how long will it take for my scores to go back up?
Debbie, it sounds like you set up a payment plan with Bank of America rather than pursuing the much-maligned debt settlement approach. You may wish to contact them again to request a lower interest rate.
[…] debt settlement will absolutely affect your credit in a negative manner. After all, it is a partial default of your debt and it will be reported as such. The exception is […]