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The Danger of Debt Settlement to Your Credit Score
Posted by: Ethel Wilson from Credit Score Resource on Tuesday November 6, 2012 at 1:48 PM   (-08 GMT) | Comments (0)
Tags | Legal, | Loans | Categories: | Debt - Credit Card, | Debt
The Danger of Debt Settlement to Your Credit Score Rating

Your credit score ratings could be negatively impacted by what you may consider a positive and responsible act. Though you might feel that making arrangements to settle a debt with someone you money to is a good, positive thing, it could seriously damage your credit score and ability to obtain credit at some point in the future. A settlement is when you make an agreement to pay off less than what you owe as a final settlement of the debt. Though it relieves your debt and helps the lender avoid the expense of hiring a collection agency, it could leave a big black mark on your credit score rating.

How Working With a Debt Settlement Company Can Affect Your Credit Score Rating

You can come to an agreement with a lender yourself, but more often settlements are made by arrangement through a debt settlement company. These are the companies you see advertising to consolidate all of your debt into one grand sum. They take an upfront fee from you, and then you pay them over a period of around six months instead of paying to those you owe. At the end of that period, the settlement company negotiates a deal with the lenders, usually to pay about thirty to fifty percent of what is owed, or what they have collected so far. If your account is more than ninety days overdue, credit card companies will generally accept the offer. They follow the “bird in the hand” philosophy in such cases.

The Effect Settling Has on Your Credit Score Rating

Your credit score rating will already have taken a good beating by the time it has reached the settlement stage. Your credit history will show a number of late and missed payments, many of them possibly more than ninety days overdue. Some will be at least thirty and sixty days over. Such a string of late payments can lower your score by as much as two hundred or more points. The way a settlement affects your report depends on how the lender reports it. If they report it as “paid as agreed”, or “paid in full”, your score will not be damaged any further. If they report it as “settled” however, your score could drop even further.

Negotiate How Your Settlement is Reported to Save Your Credit Score Rating

It is possible that you or the settlement company you are working with can negotiate with your creditors that they report your settlement as “paid as agreed” as part of the conditions of your settlement. They are not obligated to do so, but many will want to have the situation put behind them. In any case, it doesn’t hurt to ask, and their agreeing will benefit your credit score rating.

How to Have a Debt Settlement Removed From Your Credit History

Debt settlements and related payments should be automatically removed from your credit report after seven years. Sometimes, either because it wasn’t correctly reported by the lender, or just because of human error, they are not. If you have had any debts go to settlement, it is crucial that you obtain a copy of your credit report to check how it is listed. Wait about six months before doing so to give the lender time to report it. It should show up as “paid in full” or the account being closed. If it is still recorded as an open account with credit due, you need to contact the lender to have them fix it. If after seven years it is still in your record, you need to contact the credit bureau by means of a credit dispute letter to have it corrected. Debt settlement may not be the best tonic for your credit score rating, but it is better than having a debt go to a collection agency.

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