Negotiating a debt settlement with your creditor can allow you to settle an account for much less than you owe. Allowing a debt management company to negotiate with your creditors can also save you money in reduced interest rates and smaller monthly payments. Each avenue of credit negotiation has a different impact on your credit score.
Debt Management Plans
Your enrollment in a debt management plan alone cannot hurt your credit score, according to Bankrate.com. Your creditor may make a note on your credit report informing each credit reporting bureau of your enrollment but this is for information purposes only. Your enrollment in a debt management plan may impact you negatively when you attempt to apply for a new line of credit, credit card or personal loan. A prospective lender reviewing your credit report can see the notations made by your existing creditors that you're participating in a debt management program. This may make you a bad risk for the new creditor.
Paying Your Creditors
Monitoring your debt management company is a key component in ensuring your participation in a debt management plan doesn't hurt your credit score. A debt management company that doesn't distribute your monthly payment to your creditors on time isn't acting in your best interests. Your creditors can still report late payments to credit reporting bureaus even if it isn't necessarily your fault that the payments are late. This is why it's important to keep close track of when your monthly payment in accordance with your debt management plan is distributed to your creditors.
Debt Settlement
A debt settlement is another form of debt negotiation where you settle a credit account for a portion of what you owe your creditor. A debt settlement can adversely affect your credit report because it your creditor is receiving less than what is owed on the account. A debt settlement also closes the account in question, which shrinks your available credit and further weakens your score. Once reported, a debt settlement can remain on your credit report for up to seven years.
Get it in Writing
It's important to get all the details in writing when negotiating a settlement or debt repayment plan with a creditor or debt management company. Without written communication between you and a company or creditor, you're essentially taking a representative's word that an agreement is valid. This can leave you open for continuing collection practices and further damage to your credit score if your creditor chooses to not abide by any verbal agreement because the person who offered you the settlement terms did not have the authority to make a deal.
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