How Does Debt Settlement Affect Your Credit Report?

Settling your debt, either with a debt settlement company, or by doing it yourself, does have a negative effect on a person's credit report. The main reason for this is because in order for accounts to be settled, one must be past due on their payments to their creditors, usually at least four months, in order to be eligible for settlement offers. Most settlement clients are past due longer than this period, however, because it takes time for them to accumulate the savings necessary to make a lump sum offer to settle their accounts. Once an account is settled, it will be reported as such to the credit bureaus (Experian, Transunion, and Equifax) for up to seven years.

Keep in mind that your credit may already be affected

On a basic level, any form of debt relief that does not immediately take action in paying the lenders the full amount that is due them in a determined time does have an effect on an individual's credit score, and it is most likely that the effect of this would be negative, although certainly having to walk the road of debt settlement usually means that an individual's credit score is suffering to some extent already.

Simply put, debt settlement will likely have an adverse affect on one’s credit profile. On a positive note, however, going through the process of debt settlement enables an individual who has been seriously delinquent behind on his bill payments to potentially see an improvement in their credit by resolving their balances. If a consumer in this position chooses to take no action, on the other hand, not only would his or her credit score continue to suffer, but the total cost of paying off the debt would only increase with late fees, finance charges, and over-the-limit fees being added on top of the balance.


Watch out for debt settlement companies that don’t tell you about the credit effects

While scouting for a debt settlement company to work with, an interested consumer needs to take caution before choosing this avenue. The debt settlement companies that market themselves on radio, television, and the Internet may offer services that might be too good to be true. Doing research will help reduce the risk that you choose an outfit that does not have your best interests in mind. By checking with your state's attorney general, the Better Business Bureau (http://www.bbb.org), The Association of Debt Settlement Companies (http://www.tasc.org), and the Federal Trade Commission (http://www.ftc.gov), you can determine if the company that you wish to work with will give you a run for your money. You can also verify if the company has had complaints filed by people who have availed of their services previously.

Of course, just because the company doesn't have complaints, doesn't mean that they are legitimate. For instance, if the debt settlement company that you wish to work with promises to make claims of cleaning up your credit report, it would be best to look for other alternatives. “Non-profit” agencies who also ask for voluntary payments and other fees up-front must be avoided at all costs. Instead of less anxiety, stress, and financial problems, these companies may do the exact opposite.

It also cannot be guaranteed that all collection calls will stop once an account is currently undergoing debt settlement. In fact, they should be expected. Bill collectors will always want debtors to deal directly with them, offering payment plans, even settlements, with a promise of stopping all collection calls. If you have already made arrangements with a debt settlement company and are still being hounded by bill collectors, you may inform them of this fact.

Aside from collection calls, it cannot be guaranteed that debt settlement will prevent lawsuits from creditors or collection agencies. When a debtor had decided to work with the debt settlement agency, the latter will not immediately start making regular payments to the creditor, and the loan will still remain at default status.

Debt settlement is one option an individual can take in terms of relieving and eliminating their debts. Now that this article has presented how it functions and its possible implications, we hope that it allows you to review your options more thoroughly and take the necessary steps to debt freedom. Talk to one of our debt consultant’s to discuss what options can help for your situation!

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