Settling Debts for Less – Bad Deal for Credit Scores

While the benefits of debt settlement companies are being touted around the country, the reality is that settling any debt for less than you actually owe will prove to have a long-term effect on your credit report, whether you are considered debt free or not.

There are many consumers who are turning to debt settlement agencies to help get out from under debt. These companies, in turn, negotiate owed balances with creditors with the mission of reducing the amount owed and getting the creditor to agree to settle for a lesser amount. While in theory your debt to that company will be considered settled, your credit report paints a different picture. When you settle a debt for less than the amount owed, the settlement will be reported to the credit agencies in one of the following manners: “debt settled for less that balance due”, “partial settlement accepted”, or even simply “settled”. It will depend on how the individual credit agency format their reports. While the account with show a zero balance, additional notes including your past payment history, all negative information pertaining to the account, as well as notice of settlement will still be a part of your credit history.

The formula used to decipher credit scores will also be impacted by the notice of settlement. Even if you paid off the negotiated amount of the debt as per the agreed upon terms, your credit score and history reports will appear just as negative as if you had a charged-off account or one involved in a bankruptcy, showing other lenders that there was a financial loss on the account – a huge red flag for lenders considering you for credit. Accounts that show negative information regardless of the age of the “offense” will negatively impact your score and history. With the negative information, the most recent activity matter most as does the worse activity listed under the account. Both pieces of information can be debilitating for your credit.

Of course, negative settlement information is not the end-all-be-all of your credit. Your score calculations will also be dependent upon the other information contained on your credit report. If you have only one account in settlement status and an otherwise good history, you credit score will not suffer as much as if five accounts were in collections and you settled a good majority of your debt.

While debt settlement may be the most reasonable option for you to get out from under debt, know that there will also be consequences to your credit report that follow you for the next seven years of your life. The best thing you can do for yourself is to learn from your past financial mistakes and take precautions to be sure that you never get in the same situation again. Use budgeting and financial planning to help aid in your efforts to stay on track financially.