Does Debt Settlement Hurt My Credit Score?

April 23rd, 2010 | Posted in Credit Card Debt

It’s not uncommon for someone to have racked up thousands of dollars in consumer debt. What are rare are the stories of that bill being cut in half through debt settlement. While the actual saved percentage may vary depending on circumstance, this kind of thing does happen in the real world – but not penalty-free.

Though most of the stories in real life are less shocking, many do find the need to settle their debts. Usually it is because their debts have reached a point so high that they are financially unable to pay them. At other times massive debt can be accrued by mis-communications, misunderstandings, or just plain stubbornness on part of an angry customer who didn’t like the goods or services received.

In any such instances, both debtor and creditor must come to some sort of an agreement. The debtor is unable or unwilling to pay, and the creditor would rather receive partial payment than no payment at all. The two parties negotiate terms and ideally reach a settlement favorable to both.

The benefits of debt settlement are enormous. Financially both parties come out at the top end of the bargain, while emotionally there is tremendous relief through peace of mind. Physical health may also improve, as your body no longer has to deal with all the stress that comes with being liable for a debt you are either unable or unwilling to pay.

Debt settlement affects your credit score in the category of your payment history. The other two categories making up your credit mix which determine your FICO score are the ratios of debt-to-income and debt-to-credit limit. Take a look at how you’re doing in each of these areas to determine which categories you are strong in verses which are already weak.

If your payment history has been perfect until now, your credit score will definitely take a turn for the worse. If you have some weak spots in that area, though, it might not be so detrimental. The first hit is always the hardest, while subsequent blows carry less impact.

If you have made your payment on time every time up until the point of debt settlement, your FICO score will drop dramatically. On the other hand, if you have missed a payment or been 30-days past due, debt settlement may not affect it as harshly. The first hit always carries more weight against your credit score than subsequent failures.

Debt settlement can also dramatically increase your cash flow. When an account is settled, you are no longer responsible for the accumulating late fees and interest. Also giving you a peace of mind, there are many attractions to settling your debt.

Nitro Credit’s main objective is Credit Repair, Credit Education and Credit Management. We help people improve their credit reports and increase their FICO score.