Debt management Settle can be a scary time, especially when the bills start to look daunting and paying them becomes a struggle. One solution that many people contemplate is paying off debt. However, a lot of people question that does settling a debt hurt credit and what effect settling debt has on their credit score. Let’s put this in less jargony terms.
What Does “Settling Debt” Mean?
Debt settlement is when you come to an agreement with a creditor to pay back less than the full amount owed. If, for instance, you are $5,000 in the hole to a creditor, it may accept $3,500 as full payment. This could save you from filing for bankruptcy or prevent harassing collection calls, but it also has consequences for your credit report.
The Impact of Debt Settlement on Your Credit Score
Immediate Impact
- When you pay off a debt for less than the full balance, it is typically reported to credit bureaus as “settled” or “paid settled.”
- This is not as good for your credit score as the status would be with “paid in full.”
- Most credit scoring formulas are going to score a settled account less favourably, and, as such, your score will likely go down once you settle the debt.
Length of Impact
- A settled debt may appear on your credit history for seven years following the original delinquency date.
- Eventually, the impact on your credit score will lessen as long as you keep making timely payments on other accounts.
Credit Applications
- Creditors might see a paid debt as evidence of difficulty with money.
- While it doesn’t stop you from getting a loan, it might change the rates at which you are offered loans.
Benefits of Settling Debt
While the impact on your credit may be painful at first, there are several benefits to debt settlement:
- Escape from bankruptcy: Settlement is commonly more preferable to bankruptcy.
- Ceasing collection calls: Collectors are supposed to stop calling you once the debt has been resolved.
- Debt reduction: You pay less than you owe, freeing up money for other financial goals.
Tips to Minimise Credit Damage
If you do choose to resolve a debt, here’s how to minimise the impact on your credit:
- Get the settlement in a contract: You should always have an agreement about a settlement in a written contract before you start paying money.
- Bargain: Some creditors might agree, when you owe less than the full amount due, to accept less and report the account as “paid in full.” Ask if this is possible.
- Pay on time: If there are any outstanding payments or instalment plans, they should be paid on time to avoid additional damage.
- Keep an eye on your credit report: Monitor your credit reports to make sure the debt is reported accurately.
Alternatives to Settling Debt
If you’re concerned about credit impact, here are some options:
- Debt management plan: Partner with a credit counsellor to pay down debt over time.
- Debt consolidation loan: Multiple debts are combined into one loan with a lower interest rate.
- Negotiating payment plans: In some cases, creditors accept reduced amounts without characterising the account as “settled.”
Conclusion
Debt settlement can be an effective way to manage crushing financial struggles, but it carries credit consequences. Your score could suffer, and the account will stay on your credit report for years to come. But the long-term advantages of being debt-free usually outweigh the short-term clobbering your credit score takes.
If you consider how debt settlement works and are careful about it, you’ll preserve your financial future with less debt. And don’t forget, you can heal your credit score over time through responsible money management and paying on time.
