Credit Impact of a Debt Settlement Program

No matter how you decide to handle your debt, it’s likely to have a significant impact on your credit. So what happens to your credit if you consolidate your debt with a debt settlement program? There are no guarantees, but here are some things to keep in mind.

Missing payments hurts

Nearly all debt settlement programs require you to discontinue making payments to your creditors while funds are accrued for your eventual settlement offer. Payment history is the number one factor in nearly all major credit scoring models. This means that your credit score is likely to be hurt significantly by the months of missed payments required for most settlement programs.

Closing old accounts hurts

The older the age of your open credit accounts, the better. Debt settlement usually requires that your credit accounts become severely delinquent – at which point they are very likely to be closed. Those accounts closing could lower the overall age of your accounts and drop your score slightly, although the impact would likely be minimal compared to the damage done by the accounts becoming severely delinquent.

Repaying less than the full amount hurts

The primary benefit of debt settlement is that you won’t repay your creditors for the full amount owed. This sort of “less than full balance” repayment may be reported by the creditor and may be factored negatively into your credit score.

Settled is better than unpaid

While having accounts listed as “paid settled” may be less positive for your credit than having accounts listed as “paid in full”, it’s still much better than having accounts listed as “unpaid.” If you can’t repay your debts under normal circumstances, it may be better in the long run to take the credit hit of a settlement and then begin rebuilding your credit with a (mostly) clean slate.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.