As an indication of credit worthiness, credit ratings play a significant role in loan eligibility, interest rates, insurance premiums and potential employment. Settling a debt can impact your credit rating in one of two ways. Negotiate the best possible agreement for yourself and your credit before you settle a debt.
Definitions
Your credit rating is a numerical indicator of your financial health at a particular point in time. The number is calculated from information reported to the credit bureaus -- Equifax, TransUnion or Experian -- by creditors as well as information derived from public records. A debt settlement is most often reported by creditors as "settled for less than originally agreed." This statement and the accompanying account information can negatively impact your credit rating for seven years.
Options
Settling a debt for less than you owe is better for your credit rating than not repaying the debt. Missing payments are reported as delinquencies on your credit report, but these accounts could become collection accounts and judgments, which can significantly reduce your overall credit rating. Another option to settling a debt can positively impact your credit rating. If possible, renegotiate the payment plan with the creditor. As you make timely payments, your credit rating will increase.
Impact
Roughly 35 percent of your overall credit rating is attributed to how you pay your bills. A settled debt notation on your credit report tells potential lenders that you did not repay the loan amount in full, which falls into the 35 percent category for credit score calculations. The total outstanding balances of all of your reported debts as compared to the total credit available to you accounts for 30 percent of your overall credit rating. A settled debt would not be included in this part of the calculation, but a renegotiated payment plan or a delinquency would figure in these numbers.
Negotiations
Before you agree to settle a debt, negotiate with the creditor to remove the account listing from your credit report. Reporting agencies are clearinghouses; they report what is given to them by creditors. If you neglect to include this stipulation as part of your settlement agreement, the creditor can report the settled debt for seven years, which will negatively impact the largest computation in your overall credit rating. Get the agreement to remove the listing in writing.
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