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Learn How Debt Settlement Affects Your Credit Score

Debt settlement can be an appealing option to consumers struggling with high levels of credit card debt. Because it allows borrowers to pay less than the total amount they owe, they think they’re getting a better deal than if they had to pay off the debt in full. But what many don’t realize is that settling debts can have major long-term implications on a person’s credit. Here’s the truth about how debt settlement can affect your credit score.  Stack of bills stamped overdue and final notice for debt settlement

Missing Payments

As part of the process, the debt settlement company may advise withholding payments to creditors and allowing accounts to become delinquent. They do this as a negotiation tactic to persuade the creditors to accept a lump sum payment for less than the total amount the consumer owes. It’s not just one or two payments, either. The debt settlement process can stretch out for several months, if not years. During this time, creditors often resort to aggressive collection measures.

Lower Credit Score

Since payment history counts for 35% of what determines your credit score, months of missing payments will cause your credit score to drop. While debt settlement will eventually result in accounts being paid, the lower score and history of missed payments will make it hard to find lenders willing to take a risk to extend any additional credit. Those that do are likely to charge higher-than-average interest rates.

Not All Debts Can Be Settled

Even if you settle all your credit card debt, you may not end up debt free. If you owe any back taxes, child support, alimony or student loan payments, they cannot be part of the debt settlement process. In most cases, vehicle and home loans are also exempt from debt settlement.

While debt settlement may seem like an easy fix to credit card debt problems, the long-term damage it does to your credit probably is not worth it. Before choosing it, explore other options, including negotiating with your creditors directly, or pursuing credit counseling and possibly, a debt management plan.

Looking for alternatives to high credit interest rates?

We can help. Our online credit counseling will:

  • Provide a free financial assessment
  • Determine your income, expenses and total debt
  • Create a manageable budget
  • Suggest solutions to help you reach your financial goals, which may include a Debt Management Plan

Clients on a Debt Management Plan typically pay off credit card debt in 5 years or less. Sounds good, right?

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