Can Debt Settlement Affect Your Credit Score?

Can Debt Settlement Affect Your Credit Score?
Benjamin Beckwith
By: Benjamin Beckwith
Posted: November 18, 2013
Experts share their tips and advice daily on, helping subprime consumers navigate the world of personal finance.

Your credit score is a precious thing and you should take good care of it.

However, it’s definitely a tough job to maintain high credit score. There are lots of factors that may tarnish your credit score.

For instance, if you fall behind on your debt payments, close credit card accounts, go through foreclosure or file bankruptcy, then your credit score will drop. Not only this but your credit score also drops when you settle your debts.

However, with time and perseverance, you may repair your credit even after debt settlement.

How debt settlement may take a toll on your credit score:

It’s obvious that after debt settlement your credit score will drop to some extent. As FICO has decided, if your credit score is 680, then you’ll possibly lose 45 to 65 points after debt settlements. With a credit score of 780, there are chances for you to lose 105 to 125 points.

As you can see, the credit score drops according to the level of your existing score. If you have a high credit score, then the impact will be severe as well. People with already low credit score won’t lose much after settling their debts.

Apart from this, your credit history, number of accounts you’ve settled and credit utilization also matters when it comes to assessing credit score after debt settlement.

People often settle the credit card accounts that are in good condition. In such a circumstance, the credit score will be hurt even more, as you’re not paying the accounts in full. Late payments during the settlement process may also jeopardize the situation.

Debt settlement generally remains on your credit report for seven years. However, with time the impact of debt settlement reduces as the information gets old.

Is there any way out for debtors who can’t do without debt settlement?

Well, if you’ve already fallen behind on payments and can’t pay off your debts in full, then you’ll have to settle your debts.

However, it becomes extremely essential to take good care of your credit score after going through a debt settlement. You won’t be able to remove the information of settlement from your credit report before seven years, but you can try to improve the score.

By following the tips below, you may repair your credit score successfully:

1. Be careful about your credit accounts.

You need to be extra careful with your credit card usage. Pay your due bills on time. Regular payments will not only save you from debt accumulation, but your credit score will improve also.

2. Get a secured credit card.

A secured credit card may help you to improve your score. Secured credit cards make it easier to keep the expenses under control. Controlled expenditure balances finances as well.

3. Never encourage debt accumulation.

Debt accumulation is neither good for your finances nor for your credit score, so you must try not to accumulate debts. At least avoid debt accumulation until your credit score improves.

It’s impossible to curtail the impact of debt settlement on your credit score. Only you need to be a careful consumer, that’s it.