How Does Debt Settlement Affect FICO Scores?

Settling Debt

It seems like the right thing to do. Your credit card balances are mounting and the interest rates on them seem to be more than you should be paying. In the near future your life will change and you'll need to keep more money in your bank account. You haven't missed a payment on anything in years, but you feel at risk of missing one because of tough economic times. So debt settlement seems like a good way to cut off the problems before they start, right? Well, maybe. Debt settlement can keep more money in your pocket, but how will it affect your FICO score? This article will explore the relationship between debt settlement and FICO scores.

FICO and Debt Settlement

FICO is an acronym for Fair Isaac Corporation. It was a consulting firm made in 1956 that advised on decision management. They came up with the system to assess a score to a person's credit so that businesses could have a tool in deciding whether a person should be given credit or not. Your score can range from 350 to 800, with a good score averaging around 700 for most businesses. FICO scores are composed of five main factors: payment history, current debt, credit history, new credit and other factors. Payment history accounts for an estimated 35% of your score while current debt can account for 30%.
If you enter a debt settlement program, chances are the company will ask you to stop making payments to those credit cards because the company will try to negotiate a smaller payoff. Let's say you owe $1,000 to a credit card and you feel like you can't afford to make the minimum payments forever. The debt settlement company may convince the creditors to accept $600 as a payoff. You would slowly make payments to the company until that $600 balance is reached. At that time, the settlement company would pay off the credit card.

Debt Settlement and Damage to Your Credit

But what happens to your payment history on the credit card? You are no longer paying them; you are paying the settlement company. There's a strong chance that you will show missed payments on your report to the credit card because you won't be paying them and the settlement company at once. You could potentially be worse off than before you settled the debt in the long run.

If your credit is already ruined from missed payments, this option may not be a bad one because you already have negative payment marks on your credit report. You will have a lower balance to pay off than when you started. But if your credit report shows no missed payments, strongly consider these factors before choosing debt settlement. See if the company is an accredited one and find out from them exactly how their plan will show up on your credit report.