How will debt settlement affect my credit score?
Debt settlement means that your creditor has agreed to accept a lesser amount than what you owe to satisfy your debt. This is great from a getting out of debt stand point, but what affect will this agreement from your creditor to accept less have on your credit score? It will more than likely be reflected as settled or paid and settled on your credit report. There is a chance that the creditor could reflect it as paid, but chances are it will be reflected as either settled or paid and settled. Of course, this doesn't look nearly as good as just paid. On the plus side, it doesn't look as bad as a bankruptcy. When you're in true need of debt relief, it's the cost of getting your debts knocked out, unfortunately. In the end, though, this will free up your cash flow and with some good financial choices from that point forward, you can start rebuilding your credit.
The affect debt settlement has on your credit score will also be determined by how many debts you settle. The more debts you settle, the worse the impact. On the contrary, though, the more debts you are in need of settling, the more financial relief you stand to gain. It's really just a question as to whether you are truly in need of debt settlement. If you are, then the impact is just a necessary downside to what you must do to get financially right-side-up again.
What's your starting point?
By starting point, we mean are you current or already delinquent before you started your debt settlement program? Why? This will also determine how much impact debt settlement will have on your credit score. This is because if you are already delinquent, your credit either won't drop much further or anymore at all. This is because after you have been delinquent for several months, you won't take any more credit his as a debt goes more and more months past due. Your credit report, however, will show that you are further and further behind every month, but the credit score impact will not continue to get worse.
As part of a debt settlement program, you will more than likely be advised to stop making payments to your creditors, and instead, make payments into a debt settlement account where your funds will accumulate until you have the need amount built up to pay the agreed settlement amount that has been worked out between the debt settlement company representing you and your creditors. The creditors won't typically accept a lesser amount until you've been delinquent by 180 days or more.
Once you have graduated from a debt settlement program, you can start rebuilding your credit. Even though the settlement will be reflected for seven years on your credit reports, the impact it has on your credit will become less and less as it becomes older and your credit reports start reflecting more and more positive credit history.
More tips on rebuilding your credit after debt settlement
Other than just waiting for the negative hits you took for settling your debts to fall off your credit report, there are ways that you can start improving your credit immediately. You will need to use some means of credit. Even if it's only a small department store card, or a card you still have active because you didn't include it in the settlement program. You will want to use that means of credit responsibly. By responsibly, this means to use it only on necessities and make your payments on time or early every single month.
Don't max out any lines of credit you have available to you. Leave approximately 70% of the credit available on any line of credit you have open. This will show that you are using credit wisely and are not maxed out on your lines of credit.
The biggest plus in the end is that you are now training yourself to use credit responsibly. Yes, there are situations you where you can find yourself upside down financially because of a sudden loss of income or some catastrophic expense, but if you are in a good position financially when and if a moment like that occurs, you will be much more likely to stay afloat and weather the storm.