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How Debt Settlement Affects Your Credit Score

How Debt Settlement Affects Your Credit Score

Debt Settlement Defined

Debt settlement is a debt relief option where debtors negotiate with their creditors to pay a lump sum amount of money to settle their outstanding debt for less than what they owe. For instance, if you owe $10,000 to your creditor and negotiate to pay $5,000, your debt is considered settled. Expand your knowledge with this external content! united collection bureau, check out the recommended website.

Short-Term Impact on Credit Score

The short-term impact of debt settlement on your credit score is rather significant. Debt settlement companies often encourage their clients to stop making payments to their creditors, thereby leaving accounts delinquent. Once the account is delinquent, it will be sent to collections, which will reflect negatively on your credit score.

  • The late payments from missed deadlines will appear on your credit report and affect your score up to seven years
  • Settling debt requires paying less than the full balance, which damages the credit score
  • Settling debts with creditors lowers the average age of the accounts in your credit history
  • Long-Term Impact on Credit Score

    Debt settlement can cause long-term damage to your credit score. Even if you settle all your debts, the late payments and delinquency stay on your credit report for up to seven years after your last missed payment, dragging down your credit score for an extended period.

    The accounts that were settled will have a negative impact on your credit score, and it can be challenging to build it up again since lenders are less likely to approve your credit applications, especially for loans and credit cards.

    You may have to pay higher interest rates on loans and credit cards when your credit score is low, increasing your overall debt and making it difficult to achieve financial freedom.

    How Debt Settlement Affects Your Credit Score 1

    Debt Settlement Alternatives

    There are debt relief alternatives that come with fewer downsides than debt settlement, minimizing the risk to your credit score. Learn more about the subject with this suggested external resource. alltran financial, extra details and fresh viewpoints on the topic discussed in this article.

  • Debt consolidation: This involves combining all your debts into one account and making a single monthly payment to cover your debts. It helps you avoid late payments by streamlining the repayment process, reducing the risk Click to access this insightful guide your credit score.
  • Balance transfers: Balance transfers work by transferring a high-interest debt to a credit card with a 0 percent introductory offer. This allows you to pay off the debt fast and without interest, enabling you to improve your credit score.
  • Bankruptcy: While bankruptcy stays on your credit report for ten years, the impact on your credit score will eventually reduce. However, it is usually a last resort and comes with severe financial and emotional consequences, including the liquidation of your assets.
  • Conclusion

    Debt settlement may be a viable option to help you clear your debts, but it can have a significant impact on your credit score. If you’re considering debt settlement, make sure you explore other debt relief methods, including consolidation, balance transfers, and bankruptcy. Make an informed decision about the debt relief method that can help you get out of debt without damaging your credit score in the long term by seeking professional advice.