Negotiating a settlement with your creditor can be a viable option for consumers who are drowning in credit card debt and lack the means to fully service these obligations. Advertisements for firms promoting debt settlement often leave out the negative consequences your creditworthiness will endure once you opt for paying your creditors less than what is legally owed on the account.
Delinquent Payment Reports
Forcing a settlement with your creditor often involves getting the creditor's attention and letting them know you are serious about negotiating a settlement offer. An effective technique to accomplish this goal is to stop making payments on your credit card and let your account fall into a seriously delinquent status. If your account remains in good standing and you are making payments each month, even if only the minimum, the creditor is unlikely to accept a settlement. However, while you are falling behind on payments to increase your chances of making a successful settlement offer, your delinquent payment status is being reported to the major credit reporting bureaus and subsequently having a negative effect on your credit profile.
Charge Offs
Most settlements involve paying the creditor an amount of money that is significantly less than the outstanding balance. The rest of the balance that you do not paid is written off by the creditor and is often reported to the reporting bureaus as a charge off. Charge-off balances look very bad to lenders and remain on your credit report for up to seven years. When you have a charge off listed on your credit report, lenders will see that you essentially walked away from an obligation. In addition to lowering your credit score, lenders may be fearful to extend you credit while the item remains on your report.
Impacts on Other Accounts
Policies vary from credit card to credit card, but many creditors reserve the right to review your performance with other lenders when making decisions about your credit account. If you achieve a settlement with one creditor, other creditors may see this and red flag your account as a high-risk account. The creditor may lower your credit limit, impose a higher interest rate on your account or even close your account even if you are in good standing with this creditor. Any of these actions can harm your credit score and your ability to obtain new credit in the future.
Creditor Restrictions
Although a charge off will only remain on your credit report for seven years, once you settle a debt with a creditor by paying less than is owed, that creditor may permanently blacklist you from getting approved for new credit at any time in the future. While the damage to your credit report can be undone after many years of establishing responsible debt servicing behavior, the creditor you stiffed years and years ago may not even consider an application for you for any reason.
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