Credit Card Settlement Credit Score

Credit Card Settlement Credit Score

Debt settlement is an option to consider if you are deeply in debt. Debt settlement also known as debt negotiation can reduce debt by 40-60% of amount owed. It is important to understand the pros and cons of choosing this debt relief option and how it can affect your credit score.

How Does Debt Settlement Work?

Debt Settlement companies negotiate with creditors on behalf of consumers to settle the debt for a lower amount than truly owed. Usually the consumer sets aside money in a monthly savings account to be paid to the creditors. Settlement companies also act as a obstacle between the collection agencies and the consumer. Debt settlement cuts monthly payments, reduces interest rates, limits harassing collection calls, and helps consumers avoid bankruptcy. Though debt settlement can help consumers when their debt has becomes unmanageable it can leave a short term negative credit impact.
What is Credit Score?

According to Consumersunion a credit score is “a 3 digit number based on a borrowers’ bill-paying history and debt profile and statistical information about other borrowers that lenders use to determine the likelihood of certain credit behaviors, including whether you will pay on time.” Your payment history and amount of debt you owe are the biggest factor in your credit score. A credit score in the high 700’s is considered a good score with 850 being a perfect score. There are 3 reporting credit companies: Equifax, Experian, and TransUnion. It is important to keep your score high so you can buy a house, car or apply for a loan and get said financing at a low interest rate.

Debt Settlement and Your Credit Score:

In the first stages of your settlement program, if you already have several late payments, your score is probably already low. Settlement can help you avoid bankruptcy which from a lenders perspective is the worst thing on a credit report. A settlement stays on your credit report 7 years after the debt has been declared “settled for less than balance owed”. A chapter 7 bankruptcy stays on your credit report for 10 years and chapter 13 bankruptcy stays on your credit report for 7 years. If you had a strong credit history before settlement, and your other debts are current your credit score will enhance after the initial drop with debt settlement. This drop will occur because you are waiting to have your debts negotiated and are not making payments. Payment history accounts for 35% of your credit score. As you begin to make payments based on the settlement on your debt, in spite of if it is less than the amount owed, you will begin to rebuild your score.

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