Debt settlement is renegotiating the outstanding debt with different lenders. Though debt settlement feels like an attractive option to eliminate your debt, the fact that it can lower your credit score cannot be ignored. You can speak to your lender directly for a Debt Reduction and settlement agreement, or take the help of a reputable debt management or credit repair company. DueFactory can help you negotiate with lenders and make a debt settlement agreement.
If you are wondering whether debt reduction is worth it, here is a quick guide!
Debt settlement: Impact on Credit Score
Debt settlement initially negatively impacts your credit score. The impact depends on your credit status, debt size, condition of other debts, how much debt is settled compared to the total outstanding, etc. Your credit bureau score will be high when you have those accounts that are always paid on time, typically as per the original credit agreement norms. When you begin a debt settlement plan and pay a certain part of your outstanding debt, it changes the original agreement. After the modification, the lenders close the account but your credit score gets affected. This may also mean that other lenders might not be willing to give you credit in the future.
Also note that according to the RBI mandate, all the member financial institutions must report financial activity to the credit bureau. When there is debt settlement, the borrower’s account is updated with a flag settlement status. This further discourages the lenders to approve loans as the flag exhibits the negative intention of the borrower of not paying the dues.
How do Debt Settlements work?
Your credit report is an important financial document. It contains all your financial past and present data like account history, loan details, original loan agreement terms and conditions, outstanding balance amount, credit limit, late/timely payments, etc.
In a debt settlement arrangement, you agree with the lender to pay back a portion of your debt. The credit bureaus report your debt as “paid-settled.” However, if you plan to pay your debt in full, it will positively impact your credit. You can speak to your creditor and negotiate with them to report your account as “paid in full” to avoid hurting your score. Some creditors do not allow debt settlement for less than the full amount, especially when you have missed or delayed your payments. Please be informed that the credit report keeps reflecting the settled account for seven years from the date of delinquency.
During Debt Settlement….
While your debt is being settled, these are the things you must know:
· You may lower your credit score when you stop making payments while negotiating debt settlement with your creditors. This is because payment history is a top factor when calculating your score.
· If settling smaller accounts first, you may find an increase in the fees and interest of larger debts.
· Also, you may have to pay taxes on the settled debt amount. This sum will depend on the type and amount of debt.
· For a credit improvement, focus on keeping a new and current account well before resolving a long overdue account. An unpaid account is better than multiple late-paying accounts.
· Some creditors are reluctant to settle if they believe you can pay the complete loan amount. They may offer to wait. You can negotiate with your lender to lower your interest, remove fees, decrease monthly dues, etc. Due Factory can help you in the debt settlement process. We can determine whether debt settlement is the right choice for your credit health.
When should you consider debt settlement?
Sometimes, a low debt burden or settlement is worth impacting your credit score. Debt settlement must be considered in the following cases:
· Delayed or missed account payments that have already lowered your score.
· Old and past-due debt accounts may not have gone to the collection agency. The creditors are rarely interested in settling debts for a current delinquent account.
· If you have the largest debt hurting your credit score, prioritize it over smaller debts.
· If there has been a debt default from your side, which has crossed 180 days, then it is ideal to go for debt settlement. The credit bureaus are likely connected with the collection agency. If you cannot pay and don’t want to become bankrupt, settle your debts for a specific amount.
Mostly, delinquent debt, which remains between 30 and 90 days, does not encourage creditors to negotiate a debt settlement. Also, when you pay timely and do not miss any payments, the creditor is unwilling to settle your debts.
When is your debt settlement worth it?
Debt settlement is worth when:
· You want to lower the burden of debt and increase your financial wellness. Though your credit score will take an initial ding, it will recover after a few years. Become a responsible borrower, pay the dues on time, don’t exceed your credit limit, and quickly boost your credit score.
· Having a settled account is much better than a defaulted account.
· Debt settlement will lower your interest than the amount you originally owed. This will improve your cash flow and save money for other emergencies.
Wrapping up
Debt settlement is mostly the last option for borrowers who cannot pay the full amount outstanding. Consider the pros and cons of debt settlement and Debt Reduction, weigh the options, and make your choice. For sound advice, connect with DueFactory, your credit repair partner. We charge a nominal fee, help you eliminate debt, provide credit counseling, and resolve multiple financial strains.
Frequently asked questions
Q1. Does debt settlement hurt my credit score?
Ans. A debt settlement can initially lower your credit score. But it will gradually improve your credit score by reducing your debt burden, delinquent accounts, and developing healthy payment habits.
Q2. How can I rebuild my credit score after debt settlement?
Ans. While your credit score decreases after settling your debt, you can focus on becoming a responsible buyer. Rebuild your credit by making on-time payments, keeping credit use low, avoiding new credit, etc.
Q3. How long does debt settlement show up on my credit report?
Ans. Debt settlement stays on your credit report for seven years. Your credit score can get better with your credit-rebuilding efforts.
Q4. Does debt settlement impact equally on all credit scores?
Ans. No. A debt settlement impacts stronger credit scores more compared to the ones with bad score.
Q5. Which account is ideal to be settled?
Ans. Old due accounts of one to three years of age, large obligation accounts, delayed or missed payment accounts, default accounts, etc., can be considered for debt settlement.
Q6. Why should I seek help from Due Factory?
Ans. Professional companies can effectively and efficiently negotiate a debt settlement arrangement with your lender on your behalf. DueFactory can help you with an agreement with your creditor without hurting your credit score.