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Debt Settlements – How will it Affect My Credit – Pros & Cons

For people struggling with debt, debt settlement seems like an easy way out of financial woes. Is this the truth? There is definitely some good that the service offers. On the other hand, it also comes with its fair share of setbacks and pitfall. So, how will a debt settlement affect your credit score? Let’s shed some light on its pros and cons.

Debt Settlements

How Does Debt Settlement work?

Debt settlement is a service offered by third-party companies (aka “Debt Collectors”) where they negotiate your debts to be paid off as lower amounts. In return, you are charged a percentage on the negotiated debt.

Pros of Debt Settlement

  • Lower Single Monthly Payments

After negotiation, the monthly payment you will be making to your creditors will be much lower than before. They are able to secure better terms hence reduce your debt.

  • It Saves You Money On Large Debts

Stopped payments during the negotiations make creditors desperate and willing to accept new settlement deals. Most of the deals reduce up to 50% of your original debt which saves you a lot of money. However, this lowers your credit score as lenders indicate that the amount paid was less than the agreed amount.

  • They Help You Avoid Bankruptcy

This is a situation where you cannot pay your lenders. Filing for bankruptcy can lower your credit score. Debt settlement is a cost-effective way of settling your debts without declaring bankruptcy.

  • It Helps You Control The Period Of The Settlement Program

You can control the period depending on your circumstances. You can decide on clearing your debt in a period extending up to 3-5 years. It depends on the savings you are able to put in your separate savings account.

  • Get Creditors And Lenders Off Your Back

You consequently become less stressed as the terms and conditions are much better. This helps you avoid desperation. However, this will still worsen your score as creditors report settlements to credit bureaus.

The Cons of Debt Settlement

  • Your Creditors Might Refuse To Negotiate

Some creditors don’t even accept negotiating with debt settlement companies. For those that accept, there is no assurance that you will get a settlement deal. If you had defaulted on any payment expecting a deal, your credit score will take a hit.

  • Your Debt Could End Up Being Larger

If you cease making your payments during the negotiation process, you will pay accrued interest. Additionally, the forgiven portion could be considered taxable income and attract taxes. These costs could be 20% more than your original debt. Higher accrued debts show you are not good at managing your finances, bringing about detrimental consequences on your credit report.

  • You May Be Charged High fees on Partially Settled Debts.

The settlement companies charge their first commissions after you have made the first repayment, after the agreement. The rest is charged on the rest of your remaining unsettled debts.

Consider this: If your total debt was $20,000, and your negotiated payment becomes $15,000. The debt settlement company may agree to settle $10,000 of the initial debt. They are allowed to charge a commission of up to 50% on the $10,000 as a fee even though you still owe $5,000 more.

  • It Could Lower Your Credit Score

Debt settlement companies advise you to stop making payments for two reasons:

  • To force lenders to accept their deals.
  • So that you can save money and make a lump-sum payment.

But this may be at a point in which no agreement has been reached and those failed payments reflect negatively on your credit reports which will definitely lower your credit score.

The Bottom Line

A debt settler can require you to give them a large lump sum, meant for debt repayment. They can hold the funds in escrow for months or years, as they negotiate with your creditors.

This cash could have helped you instead of being held. It gets even worse, they may refuse to return it, if you had already unknowingly signed documents giving rights to it. Furthermore, if they take long without paying the lump sum, your credit score lowers as you are defaulting on payments.

Debt settlement is never easy; it comes with hidden charges and risks. Given the above points, it is advisable to seek credit counseling before choosing debt settlement.

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David Burgess
David Burgess
19:02 20 Aug 19
Derick and his team have been extremely helpful and informative throughout this entire process. I would recommend to anyone who wants/needs to repair credit quickly! Worth more than the money without question!
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Derick and his team were awesome! I would highly recommend their services if you are looking to refurbish your credit score!!! +A all around for his team and the willingness to help me out !
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Felicia helped me out so much, the company is professional l, but they treat you like your their only client. They are thorough and honest and my credit score has gone up remarkably ever since I started working with them. Thank you so much!
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Good folks. Money well spent. Their service works! I finally got my credit straightened out to where I could buy a home because of them.
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This company provides a great service! Friendly staff, plain-spoken, direct, no nonsense. They really make you feel like they care. Simple and straight-forward approach. They analyze your credit report and quickly make a plan to step-by-step repair any flags. I highly recommend their program.
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Christian Wunder
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They have been great to work with. Going on 3 months now and my score has taken a huge jump. I've had items removed from my credit and every month we go over our strategy to maximize the improvements. Highly recommend :)
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Baron Adelmann
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Derick and his team have helped me tremendously! He explains the process of improving your credit and does all of the work for you! My credit score has improved drastically and I know that I couldn't have done it without the help of Credit Absolute. Because of them, my business has continued to thrive in a way I never thought possible. Thank you Derick and the Credit Absolute Team!
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Derek just made my day when I thought my credit was being compromised due to a balance on my late husband's credit card. He checked it out my credit health and assured me that I lost no points and the balance was forgiven. Great news! He gave me pointers on how to get my credit score even higher to put me into the premium level and coached me on getting back on my feet, credit-wise, after my husband's death. A great experience!
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I was referred to Derick when my credit score dropped 3 points as I was in the process of trying to get a mortgage loan. Derick gave me GREAT advise and also helped confirm all the credit myths I have overheard on how to improve your credit score. Not only did he give me advise, he not once tried to have me hire him like others usually do. Derick was genuine and that's hard to come across with business. :)
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Derek was completely professional and offered helpful suggestions to help me improve my credit. He was honest, in that his services were really not needed and helped to point me in the right direction free of charge. If you have any questions regarding your credit, this is the only place to go!!!
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