Questions About Your Credit Score

How Will Debt Settlement Affect My Credit Score?

Debt settlement is the last option of lenders to handle financial accounts that are remain unpaid for few months before submitting the accounts under bankruptcy.

This financial arrangement can be provided to customers who are close to filing for a bankruptcy; lenders would rather give the option to the customer to make a partial payment rather than not receiving any amount at all.  It may sound a good idea for some who can’t really afford paying the balance in full though before filing for this arrangement, one must be fully aware on how bad this will affect the credit score.

Yes, a settlement can affect your credit your credit score negatively, and you may ask how bad will affect it?  It depends on your existing credit score, the higher credit score you currently have, the greater impact of settling the debt on your credit score.

How does it work?

The debt settlement payment arrangement is an agreement between both parties – the financial institution and the account holder – to pay the financial obligation when the account holder is not financially capable to pay it off.  A formal request should be made by the account holder and set of documents must be presented if requested by the financial institution.  This settlement is more preferred by lenders who may otherwise not receive any payment from customers who are not financially capable to pay.

How will it be reported on your credit report?

Questions About Your Credit ScoreThe arrangement will be reported as an account handled by a collections agency.  It will show as a delinquent account with a high balance.  The bank will continue to report this information to major credit bureaus until the customer settles the account.

What are the impacts of the arrangement on your credit score?

The impact on your credit score is obviously negative.  Whatever the reason behind our debt is not an excuse for not paying for it.  We can settle it for a lesser amount but we can expect this information to hurt our credit score.

The good thing about the settlement though, it is better than not paying for it.  Once we have paid the settled amount, it will be reported as a closed account with a zero balance.  However, if we haven’t settled it, the delinquency report will stay on your credit report and will create a worst impact on your credit score.

How long will this information stay on your credit report?

All information reported by financial institutions or lenders to credit reporting agencies will stay on our credit file for approximately 7 years.  It includes all the late payments and overdraft details from our financial accounts like credit cards and loans.

How about disputing information from credit bureaus?

Yes, we have rights to file for a dispute for any information reported incorrectly.  As long as we have proof to support our disputes, you should file for it.  It is every important to check the details because all information submitted to credit bureaus will either make or break our credit score.

Debt settlement has its own advantages and disadvantages.  But what matters is we are doing our best to settle our debts.  It is better to settle rather than getting away from them.  The impact of the settlement will be based on how soon we settled and paid for it.  We know we can’t get away from our debts.

Financial institutions report every single information we have on our accounts.  It is a give and take relationship.  You handle your finances and payments well, they will report it accordingly, the more it will build our credit score.