How Does Debt Settlement Affect Your Credit Score?

Are you somebody who is considering debt settlement, but turned off by the short term negative affect it has on your credit score? First off, you must truly educate yourself to how your credit score actually works. Second, you need to understand the process that is debt settlement. Debt settlement has an immediate short term negative affect on your credit score, but towards the completion of a debt settlement program your credit score will have the opportunity to become much higher than it was even before entering a program. To learn more on how this works read on.

First lets start with your credit score. The breakdown of how the scoring goes is like this 15% for length of credit history, 10% for new credit, 10% for types of credit used, 30% for amounts owed, 35% for payment history. Now the biggest factors that affect your score are the amounts owed and your payment history. These are also the two factors of your credit score affected by debt settlement. Your payment history is simply that, this is where all the payments good and bad are recorded. What I mean by good and bad is either paying on time or being late and going delinquent on accounts. All of that information has an affect on your score. Your payment history is where you will have a short term negative affect on your credit score by going through debt settlement.

This is where you have to understand how debt settlement works, no creditors will even think about settling out your debts until your accounts are 180 days past due and close to the "charge off" period. That is why in the beginning of the debt settlement process your score is lowered because delinquent accounts reflect negatively on your credit score. However, the beauty of the way the credit score actually works most people don’t understand. You see your credit score only reflects the most recent 24 month payment history of your credit report. So any of those negative remarks that may show up on your credit report won’t have any negative affect on it in 2 years. Especially once you begin establishing positive payment history again, if you are a homeowner then making your mortgage payments on time each month has a continual very positive affect on the score.

Now the next big factor in your credit score is the amount you owe and this is the hard nut to crack when it comes to maintaining a good credit score. This also is where debt settlement will improve your score and let it potentially be much higher than what it was before you enrolled into a debt settlement program. The amount owed makes up 30% of your score. If you are someone who has a large amount of bad debt or revolving credit card debt then you should check your score, because your score may not be as high as your think it is. Your score will lower drastically when you have this debt showing on your credit report. And unfortunately it takes much longer than 2 years in most peoples’ cases to pay off revolving credit card debt. By paying the minimum payment you can seriously be in debt for decades and pay tens of thousands of dollars in interest over the course of that time, especially if you are like many and find yourself stuck with a very high interest rate between 20-30% . This is where debt settlement can be a savior.

If you use the right company preferably a law firm to handle your debt settlement case you can find yourself completely out of debt in anywhere from 1-3 years depending on your situation. While going through the process you are building up funds in preparation to make a final settlement agreement with your creditor. Once your negotiator reaches a settlement that bad revolving debt is no longer going to show on your credit report. This process is repeated with all of your creditors and in 2 years you can find yourself not only being out of debt, but having saved thousands off the original balance owed; and saved the thousands of dollars you would of payed in interest by paying the minimum payments for however many years that will take you.

Now once you reach this point and have no more bad or revolving debt your credit score has the potential to reach 800 or higher because you no longer owe that large amount of debt that was weighing your score down. Plus any negatives that you accumulated when you were falling behind on the accounts will no longer be having a negative affect on your payment history percent of your credit score.

You see the myth is that debt settlement will ruin your credit for good. Which is completely false! Think about it for a second, if the creditors punished you by making it hard for your credit score to deem you creditworthy again then they would never make anymore money off of you again in interest. They want to make it so you can get credit again and pay them interest. This is precisely why the payment history portion of your credit score only reflects the most recent 24 months. They want to get you back in the trap of having to start making minimum payments. Just sticking it out and paying the minimum payments will suck thousands of dollars away from you for years to come in just interest alone. Can you imagine what you might have with an extra 10 to 20 thousand dollars, by making just minimum payments this is seriously how much money you could be losing. That’s enough money for a nice car or enough money for a down payment on a very nice home, but instead of you having it you paid it to your credit card company. And if you are like many people and somehow get stuck with the default interest which is anywhere from 28-35% then your going to have some real problems and potentially lose way more than what I stated above.

What you must ask yourself is this. Does your credit score call and harass you? Does your credit score take minimum payments from you month after month, year after year? Can your credit score garnish your wages and bring you to court? Will your credit score cost you thousands of dollars in interest? The answer is no to all of these, but your revolving credit card debt will.

What it boils down to is using a legitimate company or law firm to handle your debt situation through debt settlement will not only save you anywhere from 40-50% of the amount of money you owe, but will get you out of debt in a few years which is a fraction of the time you would otherwise. So if you are someone who is riding the fence on whether to go through debt settlement because your afraid of your score lowering keep this in mind. Your credit score is very fixable, but getting out of debt by paying through the minimum payment is not. Paying the minimum payments for years and paying back that interest especially if the rate is high, is like condemning your financial future to death.

If debt settlement seems like your best option, than having a temporary reduction of your credit score shouldn’t be the main issue. Rather the peace of mind you will have that you can pay your more important bills on time without a problem. If you really want to see how debt settlement can have a positive affect on your life than gather all of your bills and tally up your monthly expenses including your credit card bills. Now just subtract the amount you pay to credit cards and other unsecured debts with interest. Imagine being able to keep that amount of money each month for savings, investments, or just to have more money to enjoy life. After you make that comparison you will understand the benefits of debt settlement and how they greatly outweigh a temporary drop in your credit score.

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