Yes, Debt Settlement Will Affect Your Credit Score

When your credit card company offers to take a settlement of your balance in lieu of payment in full to satisfy your debts, you may be relieved a bit to be rid of a debt but concerned about the impact it will have on your future credit. Settling a debt can help make your finances more manageable each month and using a debt settlement company can help you navigate through the process but dealing with the after effects of a debt settlement, generally you are left to your own devices.

What Happens To Credit After a Settlement?
Whether you settle on one or more credit cards debts, there will be other factors that will determine the impact the settlement will have on your credit score. There are four primary factors that will influence your score:

1. The amount of creditors that are reporting settlements to the bureaus as an R5 rating (meaning it’s a settled debt)
2. Your history of late or missed payments on the settled accounts and other accounts
3. The amount of accounts you have on your credit report that show positive activity
4. The average age of your credit accounts

Credit scores are a complex calculation of all of these factors and there is no one way to determine how a settlement, or several, will impact your score. What is important is what you do to prevent the rock-bottom lowering of your credit score. Being proactive about your credit after a settlement can help you keep your credit in better standing. Follow these tips to help prevent a complete bottoming out of your credit score:

Discuss the Impact with your Creditor Before Agreeing to Settle
You can speak with your creditor directly about how they will report your settlement to the credit bureaus. Your creditor may not be willing to work with you but it doesn’t hurt to bring it up. Ask them if they would consider reporting that your debts has been paid in full and on time (an R1 rating). Some creditors will be willing to make the reporting rating a part of the settlement deal.

Dispute the Rating with the Credit Reporting Agency
If your creditor reported back to the credit agency a less than desirable rating, you can order a copy of your report and then follow the procedures to have it disputed. It is recommended that you wait awhile before using this method because the credit bureau will immediately go to your creditor and ask for proof of the information. If you wait 6 months to a year before filing the dispute, the creditor may be less likely to return the information within the alloted 30 days. If the creditor fails to provide the information, by law the information must be removed from your credit report, thereby increasing your score.

You can also choose to do nothing and just work on getting your credit back up to par over time by continuing to maintain your other accounts. Settling your debts is a step in the right direction towards better money management and better credit ratings. Stay on the right track after the settlement and you will see your score start to improve over time.