Will Debt Settlement Look Bad On My Credit Report?

Jealousy is a natural emotion to feel after hearing of someone whacking their credit card bill in half through debt settlement

. It seems so unfair to the rest of us struggling to make our monthly payments that those who are in the most financial trouble seem to get the easy way out. Likewise, it seems outrageous that companies would accept less than their due from someone who owes them money.

First let's take a look at why someone would want to settle their debts. Usually it is because they are simply unable to pay them anymore or keep up with the growing interest. Misunderstandings or dislike of the goods or services received may also be a reason for debt settlement.

In any such instances, both debtor and creditor must come to some sort of an agreement. The debtor is unable or unwilling to pay, and the creditor would rather receive partial payment than no payment at all. The two parties negotiate terms and ideally reach a settlement favorable to both.

It's great to have your debt settled and taken care of on a level that you can handle. Emotionally and financially the benefits are enormous. What most people don't know, though, is that while an "unpaid" collection has a negative effect on your credit report, so does a "paid" one.

First take a look at your credit mix: payment history, debt-to-income ratio, and debt-to-credit limit ratio. Debt settlement affects your payment history but not the other two - so examine your standing carefully. Are you already weak in your payment history, but carry little debt?

After a debt settlement, your credit score will definitely take a dive for the worse if you have had a perfect payment history up to that point. If you have already had a late payment, however, there would be much less damage. Later blows hold less of an impact on your credit report than the first one.

If you have made your payment on time every time up until the point of debt settlement, your FICO score will drop dramatically. On the other hand, if you have missed a payment or been 30-days past due, debt settlement may not affect it as harshly. The first hit always carries more weight against your credit score than subsequent failures.

Debt settlement can also dramatically increase your cash flow. When an account is settled, you are no longer responsible for the accumulating late fees and interest. Also giving you a peace of mind, there are many attractions to settling your debt.

by: Marcus Meilleur

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