What Does Debt Settlement Do To Your Credit Score?

June 27th, 2010 by admin

People are faced with some difficult decisions in tough economic times. One such decision is whether or not they should declare bankruptcy or seek the help of a debt settlement company.

If you truly want to reestablish yourself financially, bankruptcy will make that difficult. A bankruptcy remains on your credit report for up to seven years. Getting credit or loans after a bankruptcy can be a daunting task. You typically end up either paying high interest rates or you’re given a relatively low amount of available credit. You are lucky if you can get any credit at all because every credit report pulled for the next seven years will show details of your bankruptcy. In most cases, your credit or loan application will be rejected due to the bankruptcy, regardless of how well you are currently handling your finances.

Settling with your creditors is completely different than declaring bankruptcy. You are at least making an effort to pay off a substantial portion of money owed. You turn to a negotiator to act as your representative to creditors. Together your negotiator and creditors work out a plan to help you reduce your credit obligations. Your bills are condensed into one payment. The balance owed to creditors can be reduced by as much as 50%. In most cases, consumers using a settlement company can be living debt free in two to four years.

So, obviously, since you paid off your creditors, your settlement looks good on a credit report , right? This is where it gets tricky. While the settlement of debt isn’t viewed as negatively as filing bankruptcy, it’s still going to linger on your credit report for some time.

For starters, creditors are not usually open to settling money owed to them until someone has defaulted on their payments for a few months. They then worry that the consumer will end up filing bankruptcy and that they’ll never reclaim their money. Settlement sounds like something they should consider. The problem here is the fact that the unpaid debt and missed payments will show on the credit report.

The credit score is most likely already damaged by the time settlement efforts begin. It may be four to six months before a settlement company issues a payment to the creditor. That should be a rough patch on your credit report. And, even when your settlement company settles your debt with creditors, accounts on your credit report will be updated to read Paid-Settled or Charged-Off Settled, which aren’t seen as favorably as Paid In Full.

It can take a few months; sometimes a year or more, to qualify again for unsecured credit following debt settlement. That said… bankruptcy is still much more damaging and self destructive to your overall financial health than settling with creditors. Just be aware that settling with creditors will show on your credit report as well.

In Conclusion, by researching and comparing several debit settlement providers, consumers will be able to determine the service that meet your financial situation properly, plus the cheapest interest rate available on the market. For instance, see our latest debt settlement company review: Review of Priority Debt Settlement.

However, it’s recommendable working with a seasoned and reputable debit counselor before a conclusion is made, this way you will save time through seasoned advise and money by obtaining better results in a short span of time.