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.