What You Need to Know about Debt Settlement

The views and opinions expressed in this article are those of the author only and are not endorsed by Credit.com.

Victoria Blake is a financial advisor and a writer at CreditFixed.

Does settling a debt hurt credit? The short answer is yes, it can and probably will. However, that does not mean that you shouldn’t do it. There are situations in which settlement will affect your score less than the available alternatives. If you’re currently in a tight spot financially and wondering what the best next step to take is, then you have come to the right place.

How does debt settlement affect your credit? Alternatively, how can it actually help it? For what amount of time will the history of a settlement decision follow you? Read on to learn the answers to these questions and more. If you’re having a hard time deciding which path is best for you, check out the best credit repair companies below to get some help in making your decision.

How Debt Settlement Works

As of the end of 2020, the level of American consumer debt hit $14.56 trillion. This incredibly high number is mostly composed of financial situations relating to peoples’ homes, vehicles, and loans taken out to pursue higher education. The average American home owes around $6,270 in credit card debt. If you’re among this group of people who have the weight of owed money hanging over your head like a black rain cloud, you’re not alone. You may also be relieved to hear that you’re not out of options if you have past due debt.

If you’re not familiar with the concept of settlement, it is fairly simple to learn. Essentially, debt settlement means making a deal with the organization or individual you owe money to. These deals typically consist of some type of agreement in which you’ll pay a lump sum by a certain date in exchange for your lender to reduce the amount of what you have to give them.

There are two primary approaches you can take: you can recruit the skills and wisdom of adebt settlement company, or you can opt for a do-it-yourself route. If you go with the first option, your chances of reaching a successful bargain with the entity to which you owe will likely improve. However, you may end up paying more in retaining fees for the services you utilize. If you do it on your own, your chances of obtaining a stellar deal decline, but you won’t have to pay extra in legal or professional fees.

Debt Settlement: Pros and Cons

Decisions about settling should not be made without a detailed cost-benefit analysis of your situation. Factors to consider in this analysis include but are not limited to the size of your owed funds, the length of time you have been in a hole, and what your future plans are. Only after you have thought about these things should you move on to considering the pros and cons of settling.

Some pros of settling include:

Reducing the overall number of dollars owed
Negotiating a number that you will realistically be able to pay off soon
Potentially freeing yourself of all credit card debt and other financial burdens
Fending of looming bankruptcy
Improving your overall mental health and wellness.

However, as are all things in the world of late payments, there are also cons to this route:

Your new deal might not be good enough to make it worth it;
Debt settlement affects your FICO credit score
If you do not follow through with your newly made deal, your debt could actually increase.

If you don’t feel as though you are economically savvy enough to analyze these factors on your own, it’s likely in your best interest to obtain well-practiced assistance. After all, the last thing you want to do is make your situation worse for yourself.

How Does Debt Settlement Hurt Your Credit?

It’s true that you canhurt your credit score by deciding to negotiate a new agreement with your lending entity. However, the question you have to ask yourself is this—in which situation would you be worse off? If there is a 0-50% chance that will ever be able to follow through with payment on what you’re indebted to, then settling is likely the option you should take. However, once you do so, this decision is going to be noted on your profile.

That means that if you apply for new funding, whoever you’re asking for aid will see that you’ve been unreliable in the past. If you don’t plan on leveraging your credit limit in the near future though, this doesn’t really matter. Plus, a potential lender might prefer to see that you successfully paid off a settlement as opposed to seeing that you are still drowning in owed funds.

How Long Does Debt Settlement Stay on Your Credit Report?

What happens when you settle a debt? After you’ve paid off what you owe in alignment with your new agreement, you can breathe a sigh of relief. After all, the debt collectors will be off your back! However, you’re not out of the woods just yet. Expect that evidence of this negotiation will appear on your credit history for up to seven years from your first delinquency instance.

There’s no good way around this. Your only option might be submitting a letter in dispute of the information on your account if you find that it is incorrect. However, if your profile reflects an accurate history of your finances, you’re stuck with the evidence of your settlement payment for the better part of a decade.

How Long Does It Take to Repair Bad Credit after Settling?

Once you dig yourself out of debt, you can begin the road to improving your credit standing. There’s no single answer to the question of how long this will take, as it depends on your unique circumstances. It could take anywhere from around a year to many years. The best way to expedite the process, though, is to save money and make timely payments going forward. By doing so, you could avoid accumulating any additional negative impacts on your account.

As a result, your answer to, “does settling debt help credit?” may actually end up being yes. So, as long as you can get back on track after locking in your new deal, you can help yourself out in the long run. The sooner you can get out of the hole and on the road to recovery, the better.

Alternatives to Debt Settlement

Realizing you don’t want to engage in a settlement with credit card companies or any other entity you owe to? In the end, you may find that this is a wise decision, as making a deal could harm you further. Fortunately, there are a few alternatives to credit card and other debt settlement. Although some may be considered as a last resort. They include but are not limited to:

Filing for bankruptcy
Requesting forgiven debt
Hiring a professional to help you with your home economics
Strapping down, saving more, and getting out of the hole organically.

Whether you don’t want to arrange a deal with your lender because of the unavoidable debt settlement credit impact, or because you simply don’t think you need it, you have options. There are also different ways to reorganize what you owe so that it’s easier to whittle down and grow more slowly.

Summary

The decision of settling on credit cards and other types of debts owed is an extremely personal one. Only after sitting down and performing an entire evaluation of your current financial situation can you determine if negotiation is the best option for you. If you do decide to pursue one, you can do so on your own, or with the help of practiced professionals who know what they’re doing.

Remember that settlements can remain on your account for seven years, and this bad mark can actively drag your credit down. However, it won’t make your score immune to improvement. You can counteract a negotiation agreement with good economic hygiene.

If you think you have a good idea of what you want to do but are not positive, it’s in your best interest to run your thoughts by a professional. Most importantly, remember that being indebted is not rare, and needing assistance is nothing to be ashamed of.