Debt Settlement and Credit Score

Does Debt Settlement Hurt Credit?

in Finance/Loans

Debt settlement entails a negotiation between a creditor and a debtor concerning the reduction of the total amount of a financial obligation. As you might well imagine, settlement of unsecured loans can affect your credit score in one way or another, which naturally raises the question, does debt settlement hurt credit?

Before answering this question, it is worth noting settlement companies can only negotiate relief on unsecured debts including personal loans, credit card debt, medical debt or private student loans. Car loans, mortgages, utility bills, overdue taxes and government backed student debts are not negotiable in this fashion.

Why Your Credit Score Matters

Your credit score is one of the essential tools utilized by creditors when considering extending you a loan. It is considered a strong indication of your creditworthiness, or the likelihood of you repaying the loan. Your credit score is based upon several factors including the number of open accounts you have, their payment status and the amounts owed on them.

When you have a higher credit score, lenders will trust you with their money more so than a person with a low score. This can mean more favorable terms, such as lower interest rates. It can also mean an easier time finding an apartment, buying a home, getting insurance and securing employment.

What Your Credit Report Reveals

Your credit report shows your addresses, employment history, social security number, and credit history. It discloses your credit accounts that are in good standing and those that are behind or in default.

Having understood how important the report is, it is also vital to note your settled debt account will be reflected on it for up to seven years. If you paid your loans on time or vice versa, it reflects on the report even after the debt negotiation and settlement.

Debt Settlement and Your Credit Score

Here is the key thing to bear in mind when asking if debt settlement hurts your credit. Your credit has already been hurt if you’re a viable candidate for this form of debt relief. You’ll have late and/or missed payments, which are what it takes to get a creditor to seriously consider a settlement, offer in the first place.

So, the reality is while the process of debt settlement will result in a drop in your score, the circumstances leading up to that debt settlement will have already brought your score down. On the other hand, though, you’ll take the first step toward rebuilding your positive credit history when you settle a bad debt. While debt settlement in and of itself does not improve your credit score, it will make it easier for you to do so going forward.

How to Improve Your Credit

There is room to improve your credit score and get a good standing in your credit report after dealing with your financial problems. To put an end to your hurt credit, you can start by bringing all your past unpaid accounts to the current and ensure they’re settled.

You can also make all the payments on your installments or loans on time. It’s an essential step toward improving your credit score.

Working with a credit counselor to establish a spending plan is a good move as well. This can help you build up an emergency fund, which can give you a cushion in the event of a sudden unexpected expense, which could otherwise drive you back into debt.

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