Does Negotiating With Creditors Affect Your Credit Score?

Negotiating with creditors does not hurt your credit score, but missing payments to settle a debt through negotiation does. Debt settlement allows debtors to resolve credit obligations, usually for less than the full balance. However, creditors will not discuss such an arrangement while an account is current. MSN Money reports that negotiations usually are not possible until accounts are at least 90 days past due. Other negotiations, such as asking for a lower interest rate or a waiver of fees, do not affect credit scores.

Effects

Debt settlement is possible for unsecured debts, such as credit cards. SmartMoney reports that creditors and debt collectors sometimes will settle past-due credit card accounts for 20 percent to 70 percent of the balance. Debtors can approach creditors about settlements, or the lender may open discussions. Lenders may agree to negotiate if they believe the debtor is about to default on the loan.

Charge-Off

A lender's refusal to negotiate a debt that is current means debtors must be willing to suffer the consequences of debt settlement. Some debtors settle debts that are nearly six months behind and on the verge of the creditor listing the debt as a charge-off. A charge-off is an internal accounting term creditors use for accounts closed for nonpayment. A charge-off does not end the debtor's responsibility for the debt, however. Although some creditors list accounts as charged off after nonpayment for six months, other creditors may take the action sooner. Some debtors attempt to negotiate settlements before charge-off. However, significant damage is possible to credit scores with each missed payment.

Definition

Credit scores range from 350 to 850, and scores of 720 or higher are considered excellent. Scores below 620 are poor. It is impossible to predict exactly how negatively debt settlement affects a debtor's score because individual credit situations are different. Debtors with good credit scores have more to lose in debt settlement than those whose credit is already bad.

Advice

Experian, one of the major credit reporting bureaus, advises against missing payments to qualify for debt negotiation discussions. Experian reports that for-profit debt settlement firms may ask debtors to stop making payments for 90 days while seeking a settlement offer from a creditor. Experian recommends that debtors seek alternatives, such as a debt management plan directed by nonprofit credit counselors. Counselors can contact creditors on the debtor's behalf to negotiate better interest rates or lower monthly payments for a period of time. However, debtors can handle the negotiations themselves simply by calling or writing their creditor.