How Debt Settlement Affects Your Credit Score

Wondering what impact debt settlement will have on your credit score?

Does Debt Settlement effect Credit ScoreFirst, check your credit score to be sure it’s as high as you think it is. If you’re carrying high balances on your credit cards, with many of them being nearly “maxed out,” there’s a good chance that your credit score has already taken a hit. Even one late payment will cause your credit score to drop.

Next, it’s important to understand that the act of negotiating settlements on your credit card accounts is not what causes your credit score to drop. Instead, it’s actually the credit card delinquency that causes your score to drop. Let me explain.

The sobering reality is most creditors won’t even consider working with you until your accounts are near “charge-off” status. At that point your credit report will show that your accounts are 180-210 days delinquent, and you can expect your credit score to be significantly reduced. But, there is good news; your credit score will be reduced for just a short period of time, as compared to how long it would take you to pay off your credit cards through debt consolidation, or by making the minimum monthly payments.

How long will you need to tolerate a lower-than-normal credit score? Well, that depends on your ability to generate sufficient funds to pay the agreed-upon settlements negotiated and reached with your creditors. Generally, your score will improve when zero balances are reflected on your credit report – usually 30-90 days after a settlement has been paid in full. Of course if you become a client, we believe in being proactive to ensure that your account status is updated with the major credit bureaus sooner rather than later, therefore, Donaldson Williams forwards your settlement documentation free of charge, to all three credit reporting agencies, as well as a request to update your records immediately following a settlement.

Your score will continue to improve as your payoff dates are further behind you, and can expect a score of at least the mid-600 range within twelve months of paying your accounts off through debt settlement, provided your mortgage and installment loans do not reflect any late payments.

If you’re struggling each month to make the minimum payments on your accounts, and debt settlement seems to be your best option, a temporary reduction in your credit score probably shouldn’t influence your decision too much. Rather, peace of mind and the ability to pay your bills should be your main concern. If you take a realistic look at your finances, you may very well see that you’re in deeper than you thought. I urge you to gather all of your bills and add up your monthly expenses – including your credit card bills, and then minus your credit card bills. After you’ve made the comparison, you’ll likely understand that the benefits of debt settlement easily outweigh the few years you’ll need to deal with a reduced credit score. 

marie_meggeHave Excessive Credit Card Debt? If so, I invite you to Request A Free Consultation. All information you share with us is 100% confidential and there is never any obligation. You’ll receive an honest assessment of your situation with specific recommendations.