Settling your outstanding debts can be a quick way to get your debt paid off for less than you owe. While this method is effective, it is also an easy way to destroy your credit rating quickly. Debt settlement can negatively affect your credit for some time into the future.
Late Payments
To pursue a debt settlement, you will have to be very late on your payments with your creditor. Generally, they will not start negotiating with you for settlement unless you are late by six months or more on payments. If you are making your payments, they do not have an incentive to negotiate with you. Each time you miss a payment, it will go on your credit report and it can negatively affect your score.
Credit Score Impact
Apart from the late payments leading up to the debt settlement, the debt settlement itself can also wreak havoc on your credit score. Your credit score could be dropped by as much as 125 points if you had a relatively high credit score to begin with. This will make it very difficult to obtain credit in the future or get a decent interest rate on any financing that you are able to qualify for. Combined with the hit from the late payments, this will make your score go down quite a bit.
Credit Report Notes
When you go through a debt settlement, you will also find that your creditors make notes about it on your credit report. Next to each account that you close out through debt settlement, your creditor will make a negative note about your settlement. It will usually say something like "account settled" instead of "paid in full." Future creditors who look at your credit report will be able to see these notes and they will negatively impact your chances of getting approved for future loans.
Alternatives
Instead of going through with a debt settlement, you may want to look at some of your other options that are less negative for your credit. For example, you could pursue a debt management plan, which involves setting up a payment plan with your creditors. With this option, your credit rating will not be negatively affected because you are making your payments on time every month. You might also think about taking out a home-equity loan and paying off your debt.
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