How Debt Settlement Programs Affect Credit Scores

Paul Paquin By Paul Paquin, 16th Apr 2018 | Follow this author | RSS Feed
Posted in Wikinut>Money>Debt

A debt settlement program can reduce a person's debt to a fraction of the balance owed, making debt affordable to pay back. However, there are downsides that come along with debt settlement that a person should be aware of before joining this type of program.

Debt settlement downsides

Debt settlement services will require a person to fall behind on their monthly payments. By going into "default on payments" is the act that lowers a person's credit score, not the debt settlement program itself.

Debt collection companies are only willing to settle for around half of the balance owed after the debt is written off and sold to a third-party debt collection company.

After enrolling in a debt settlement program a person's creditors are not paid on a monthly basis because the accounts need to go delinquent to the point where they get charged off and sold to a third-party debt collection company.

Creditors get paid in one lump sum payment, and only after enough funds accumulate. Funds accumulate as a person makes their debt settlement program payments.

Example: Let's suppose you have 10 creditors that each has a balance of $1,000 – ($10,000 in total debt). A person's monthly payment may be around $300 per month. After five monthly payments, they will have $1,500 available for a settlement.

A debt settlement program could settle one of their $1,000 debts for $400, plus $200 for the debt settlement company fee, equals $600 in total. A person could pay $600 to resolve a $1,000 debt with a debt settlement program.

Meanwhile, their other creditors are not being paid and sitting untouched. By letting the accounts age, the debt can become cheaper. On the flipside, a person's credit score is not improving until the debts get paid off.

While on a debt settlement program a person's debt to income ratio is one aspect of their credit that will improve. As their debts are settled and paid off, they will start to have less debt – improving their debt to income ratio.

After a debt is settled and paid off, it will be reported either settled in full, paid in full or settled for less than the full amount. It will never show on a person's credit report that they joined a debt settlement program. It will not show that they filed for bankruptcy or used any type of service to resolve their debt, which is a plus.

Unfortunately, even after a debt is settled and paid, it will still show the late marks and collection marks on a person's credit report, for up to seven years on average. (all of the negative history that occurred prior to settling the debt). Some people will join a credit repair program after debt settlement to dispute these negative marks and often get them removed through credit repair, but this is an added service for extra fees.

Source: Golden Financial Services

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