Does Negotiating Credit Debt Hurt Your Credit Score?

If struggling to pay your credit card debt, negotiating a lower payoff with your credit card company can ease financial stress. While a settlement reduces how much you have to pay, this move can hurt your credit score. Understand the risks associated with negotiating credit card debt, and learn ways to lessen credit damage.

Explanation of a Settlement

Negotiating credit card debt is one way to eliminate debt without filing bankruptcy. Bankruptcy can cancel or wipe out existing debts and give debtors the chance to establish a fresh start. However, bankruptcy remains on credit records for 10 years, and it can take years to recover after a discharge. By negotiating credit card debt, debtors contact their creditors and compromise a cash settlement to satisfy the balance completely. Creditors acquire an amount that's less than the credit card balance and accept this amount as full repayment.

Effects of Negotiations

Prepare for some credit damage after negotiating credit card debt. Whenever a debtor settles a credit account for less than what is owed, creditors alert the credit bureaus to the settlement arrange. Notifications can come in the form of a statement next to the account that reads, "settled for less than the balance," or another similar notation. While the account balance may reflect a zero balance, the fact that a debtor did not satisfy the complete balance can trigger a lower credit rating. In addition, other creditors or lenders can view settled accounts on credit reports. Awareness of a past debt settlement may stop future approvals.

Avoid Credit Damage

Damage after negotiating credit card debt is primarily contingent on how the creditor reports the settlement. For example, one creditor may announce the account as "settled," whereas another creditor reports the account "paid in full." The latter notation makes no mention of a debt settlement, and future creditors and lenders checking your credit file will assume that you paid off the full balance to satisfy the debt. During your negotiations with a creditor, inquire as to how they will describe the account after the settlement. Ask that they report the account as "paid in full." If the creditor agrees, get this agreement in writing.

Considerations

Negotiating or settling credit card debt is a fast approach to remedying high balances. But if you risk credit damage, consider other alternatives to debt settlement. Methods of paying down debt that do not involve a settlement can include negotiating a lower interest rate on your debts. This decreases the amount of interest due on your credit card accounts each month and helps quickly reduce the principal owed. Pay back more than the minimum each month, apply for part-time work and avoid higher balances by using cash.