The Debt Settlement Credit Score Effect

Debt settlement

How does settling debt affect
your credit score?

How Does Debt Settlement Affect My Credit Score?

Your score is a number that indicates how likely it is that you will repay all money that you owe. If you have a high score, you are seen as a safe bet. Lenders will want you to borrow, and will give you good terms to get you on board. A low credit score, however, indicates that you have made poor financial decisions in the past. You may have missed payments or defaulted on loans altogether. Lenders will not be jumping to loan you money if you appear to be unreliable.

So when you reduce your debt through negotiation, does this help or hurt your credit score? Based on the logic above, it will hurt. Why is this so, and by how much?

Why Does Debt Settlement Hurt My Credit Score?

Simply, it tells the reporting agencies that you do not repay your debts in full. Debt settlement involves agreeing with creditors that you will pay back only a portion of your total debt. Therefore, you are not the safest person to lend new money to. So your credit score goes down.

Worse than debt settlement for your credit score is personal bankruptcy. In that case, the message in your score is that this person completely evades paying back his debts. You are a super-unreliable person to lend money to! At least with debt settlement, you demonstrate an intent to repay, which is only hindered by your inability to repay. It's not as bad a message.

By How Many Points Can My Score Be Hurt?

It partially depends upon what your credit score was before you enrolled in the debt settlement program. If you had a higher credit score, the drop may be more precipitous. Why? Because you had seemed to be very reliable, and now all of a sudden you are renegotiating your debts. That raises questions of integrity. In distinction, someone who had a moderate-low score will not see too much additional damage. They are already known as a financially risky borrower, so there's not much more drop required.

A rough estimate might be 200 points drop for personal bankruptcy, and 100 points for a debt settlement program. Again, it depends what your credit score was before, and any particular circumstances in your debt settlement program.

How Long Will This Debt Settlement Credit Score Hit Last?

In the case of bankruptcy, it can be a long time. 7 to 10 years is the standard time frame for this to be on your report. Debt settlement, however, affects your score while it is in progress. Once you have finished the program, your score will begin recovery.