Going through a debt settlement process can damage and help a person’s credit. In this type of settlement, a person contacts a creditor that they have a past due account with and negotiate down the amount owed to resolve the account and pay it off.
This can have both positive and negative implications for a credit history. Here are some ways that a debt settlement will affect your credit history.
Creditors prefer to issue credit to people that have taken a debt settlement over those who have a bankruptcy on their credit history. This is because consumers who file for bankruptcy do not pay any money at all towards their debts. The debts are then discharged so the creditors got nothing. In a Credit Card Debt settlement, the companies who are owed money get a percentage of the amount owed so at least this shows that the consumer is responsible and tried to handle their delinquent accounts.
Debt settlements can help people who have a lot of outstanding accounts. Your credit score is negatively impacted by the amount of credit line that is currently being used. By eliminating delinquent accounts, the amount of credit line being used is reduced which helps to improve the score. The better the score is, the better the case is for people to get car loans, mortgages, and personal loans down the line.
People who have bad credit and a lot of accounts in collections will not see their credit history improve very much with a debt settlement. This is because there are already a lot of negative items on their reports and a debt settlement will not help to substantially increase the overall financial score. In this instance, seek as many debt settlements that you can to remove these accounts from delinquencies. This will increase the score and help to lower the number of negative items.
When applying for new lines of credit, people who have a lot of debt settlements usually are given higher interest rates because they are considered a risk. This can hurt your overall score because the more you borrow and the higher finance charges can lower the score.
Overall debt settlements are very beneficial to credit histories; they reduce outstanding balances, bring accounts up to date, and remove negative items. This helps to improve the three major components of the score which are amount of credit line used, amount of total credit line, and number of open and current accounts.
