Debt Settlement And Your Credit Score By Debbie Dragon At Isnare.com Ezine Articles

In extreme financial situations, many creditors are willing to accept a debt settlement, as an alternative to bankruptcy. A debt settlement is when creditors agree to discount the total amount that you must pay them in order to pay and close out the account- and at times, creditors will reduce the amount owed as much as 60 percent.

Creditors consider debt settlements a good financial option when you have been behind on your payments consistently. It has been proven that individuals who consistently pay their debts late will eventually either file for bankruptcy (and the creditors get nothing), just stop paying the creditor, or end up costing the creditor so much money in collection efforts that they are better off financially to accept a settlement, even if it is 60 percent less than the total amount owed.

It is not hard to see why you, the consumer, would want to obtain a debt settlement if you are having difficulties keeping up with your payments. Who wouldn’t want to cut the amount owed in half (or more) and probably eliminate the interest on the balance completely?! The disadvantage of debt settlements is that in order to get the creditors to agree to them; you have to be in past due status which will cause negative implications to your credit score and report.

Debt Settlement impacts consumers with different credit grades differently. If you’re a consumer who has always had good credit ratings, and you suddenly find yourself with high balances that you are unable to keep up with (maybe you lost your job or the spending just got out of control), using debt settlement to repair the damage is going to hit your credit rating hard. Keep in mind however, that if you’ve had high balances for quite some time, the amount you owe is having a negative effect on your credit as well!

If you have had average credit, a debt settlement will effect your credit in the short term, but it’s easier for average credit rating individuals to restore their credit back to average than it is for good credit consumers to bounce back from a debt settlement or otherwise negative hit to their credit. In some cases, people with average credit scores make their payments on time, but other factors (the amount of debt or length of time you’ve had the debt for example) cause your rating to remain in the ‘average’ scores- a debt settlement might result in a long-term positive impact as it will reduce the amount of money you owe and give you the opportunity to start rebuilding your credit after the debt settlement program has been completed.

If however, you are a consumer with a credit rating that’s considered “bad”, (a FICO score of 600 or lower ), if your accounts have been in collections or charged off, a debt settlement may actually result in a higher credit score because you are paying off past due accounts. Not only will a debt settlement help you save money but it will hardly cause any more damage to your credit score. In fact, bad credit consumers will see an immediate increase in their scores after a debt settlement has occurred, and they can begin rebuilding their credit again.

Using debt settlement can help you get your finances back on track. While your credit report is likely to take the “hit” for a short period of time, the fact of the matter is, if you are considering debt settlement, your financial situation is already bad enough that you are probably experiencing negative impacts to your score by the inability to keep up with your payments. Once debt settlement is completed, you can work towards building a stronger credit score.

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