If you are dealing with a significant amount of debt with multiple creditors and collection calls then debt settlement is definitely the kind of decision you need to make in order to reshape your financial future. In such complex situations, people often find it hard to know the right path forward even when they are aware of debt relief solutions. It’s just like you have to solve a puzzle with a blindfold on, you know the pieces but you just don’t know how to put them together.
The Impact Of Debt Settlement On Your Credit
Even though debt settlement is a great option if you can’t afford to pay the full amount, you still need to fully grasp what you are signing up for. One of the biggest downsides of debt settlement is that it will have a negative impact on your credit score but fortunately, it’s not permanent. In simpler words, you can easily recover from the damage and it’s far better than not paying your debt at all.
How do you improve your credit score after it has taken a hit due to debt settlement? Well, it’s simple, you just need to start paying your bills on time, manage your credit card responsibly and avoid taking any future loans or if you do, make the repayments on time. Recovering your credit score and improving it is possible but it’s a time taking process and you need consistency and patience for it.
Why Does Debt Settlement Reduce Your Credit Score?
Even though debt settlement reduces your debt obligation, it will still have a negative impact on your credit score. You see, high credit scores are designed to reward the people who have been maintaining their accounts properly and making their payments on time before their credit agreement closes. On the other hand, in debt settlement, you just pay half of your debt and the other half is forgiven by your creditor. This deal negates and modifies the actual credit agreement.
When your lender makes a modification to your original credit agreement to close the account, it reduces your credit score. This happens when you don’t have enough credit left in your account and it also dings your credit utilization ratio.
In simpler words, an account that has been closed due to debt settlement will stay as a black mark on your credit report. However, it’s still a better option because missed or late payments can cause an even worse damage to your score. A debt settlement agreement at least offers you a path to just jumpstart your journey to a sound financial future so it’s definitely worth considering.
How Many Points Of A Credit Score Drop In Debt Settlement?
There’s no one figure that fits all in debt settlement. The drop in your credit score depends on various factors, most importantly, the amount of debt. Moreover, debt settlement can stay on your credit report for as long as 7 years and on average, it drops a 100 points of your score.
Is There A Way To Reduce The Damage To Your Credit Score?
Debt settlement itself is a very tricky process and you need lots of patience and consistency in your efforts to make it work. If your plan goes well and your creditor agrees on settling for a lower amount then you need to take another risk and request your creditor to just mark your balance as “paid as agreed”.
This won’t do much damage to the creditor but yes it will work wonders for you and will save you from a poor credit score. It’s an “if and but” situation but you definitely need to give it a try to save yourself from any future financial complications.
In a debt settlement, usually creditors mark the debt as “settled” and that stays on your report for years. If you have friendly relations with your lender then requesting him to mark the debt as “paid in full” or “paid as agreed” will really work wonders for you. This definitely won’t erase the damage of late or missed payments but at least it won’t be as harmful to your credit as a charge off.
Myth: Debt Settlement Will Severely Damage Your Credit Forever
It’s an absolute myth that the debt settlement damage to your score is permanent. Nothing ever on your credit report stays forever and you can definitely change it by showcasing responsible behaviour.
The damage to your score only happens in the initial stage when you are in the process of a negotiation. Many debtors have observed that once they complete their debt settlement program, their credit score starts improving when they fulfil their other financial obligations on time. It’s all about understanding that the temporary impact on your credit score is still better than any damage that happens when you struggle with monthly repayments or when you declare bankruptcy.
Effective Ways To Improve Your Credit Score After Debt Settlement
After completing your debt settlement process, here are a few effective tips that can help you recover your score quickly;
1-Hiring A Reputable Credit Repair Expert
Credit repair companies have just the right employees with the right expertise in credit reporting. If you have any errors in your report or incorrect items that are damaging your score then these experts can help dispute them and have them removed. Moreover, these companies will guide you on how to improve your score with better financial decisions.
2-Getting A Secured Credit Card
After debt settlement, you should get yourself a secured credit card in order to establish a more positive credit history. It’s the best thing you can do to get your credit rolling again. You just need to find the right banks and financial institutions that can offer you a secured card.
For a secured card, you need to deposit a security amount but don’t worry as that amount is refundable. The amount you deposit will determine your credit limit. Once you do that, you then have to use that card responsibly, keep a track of your payments and showcase a positive and more responsible behavior to prove that you are creditworthy. If you use your secured card responsibly for long enough, you will have the opportunity to upgrade it and get an unsecured card with a higher credit limit.
3-Maintaining A Reasonable Credit Utilization Ratio
When you get your secured credit card, you need to pay close attention to your balance and your credit limit. Maintaining a good credit utilization ratio means that you should use only 30% of your credit limit no matter what. For example, if you have a credit limit of $1000, “30%” means that when your card reaches the limit of $300, you should consider it as maxed out. A balance higher than 30% of your credit utilization can really take a dig at your credit score.
Is Debt Settlement Worth It?
Debt settlement won’t just make your debt disappear, in fact, it will just reduce the overall amount you owe. As there’s no way that you can get out of debt without paying a single penny, debt settlement is really a worthy deal when you are struggling through financial hardships.
It does damage your credit score, it does affect your overall credit report but no damage is permanent and that’s what you need to focus on. Once the score comes down, all you gotta do is to think of ways to just improve it and prove your creditworthiness to your creditors that you really are showing responsible and positive behavior, trying to make more informed financial decisions for a sound future.
FAQs
Q1. Is It Possible To Have A 700 Credit Score With Collections?
Yes, it’s possible to have a 700 score when your default payments go to collections. However, once this happens, you should expect your score to drop in the beginning once there’s a report of collections. It’s best to avoid such a situation and directly deal with the original creditor before it all goes into collections.
Q2. How Much Debt Will Affect My Credit Score?
Almost 30% of the score depends on your outstanding balance. You need to keep your credit card balance less than 25% to avoid any dips in your score. Moreover, 15% of your score depends on how long you’ve been in debt for.
Q3. Can I Improve My Credit Score In A Month?
Yes, it’s possible to improve your score in just a month but for that you need to first pay off your credit debt, become an authorized user, pay your bills on time and dispute any inaccuracies or errors on your report as soon as possible.
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