Can Debt Settlement Hurt Your Credit Score?
Written by
Gina Hagler
Edited by
Cory Dudak
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When you struggle to make your payments on time — or at all, each month — there aren’t many quick ways out of your situation. Increasing your income quickly isn’t likely, unless you win the lottery or discover a pot of gold. Once you’ve trimmed your expenses to the bone, there isn’t much else you can do to reduce your costs. When you reach that point, it’s not uncommon to look for some form of debt relief. Among the available options, debt settlement can be attractive, but before you go that route, you’ll need to consider whether debt settlement can hurt your credit score.
What Is Debt Settlement?
In a debt settlement, the borrower negotiates an agreement that allows them to pay less than the full amount owed. Upon payment of the agreed-upon amount, the debt is considered legally settled. This can be relatively straightforward if collection agencies own your debt since the amount they need to recover is the amount they paid your creditor. It can be more difficult if a company needs to work with individual creditors on your behalf. Either way, the goal of debt settlement is for you to pay less than the full amount owed, without having to file for bankruptcy.
What Happens to Your Credit Score?
According to Investopedia, “Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.” Your prior poor payment history remains in your credit history. Additionally, a debt settlement can remain on your credit report for seven years, during which time you can work to repair your credit score.
Is It Worth It?
After exploring your options, if you have no other options for getting out of debt, you may decide it’s worth the hit to your credit score to keep from losing your car and home. You should consult with a financial advisor before making your final decision.
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