The holiday season is the time for fun, merriment, and mindless spending. Once the holiday season is over, you would realize the consequences of all that gift-giving and shopping. When you are confronted with the credit card bills sometime in January, you often realize that you are in serious trouble and you need to take certain proactive steps at the earliest possible before it is too late.
This year too, holiday shopping has been no different. People have gone all out and have shopped until they dropped dead. “Cyber Monday sales this year surged to new highs, with a record $7.9 billion spent online that day, an increase of 19.3 percent from a year ago, according to data from Adobe Analytics. That’s after Black Friday pulled in a record $6.22 billion in e-commerce sales, while sales online Thanksgiving Day totaled $3.7 billion.”
You can well imagine from such holiday shopping statistics that many of you would be in deep debt trouble. If you are already struggling to make the monthly repayments and if you think that it is best to opt for debt settlement now, you must understand the implications of debt settlement on your credit score.
What Is Debt Settlement?
Debt settlement is supposed to be a service that is provided by third-party companies which attempt to diminish your debts by effective negotiation deals with your debt collectors or creditors, check out negotiating debt settlements for more information. Some debt settlement firms are effective in diminishing your debt. However, sometimes, their programs and services are accompanied by a certain degree of risk and may leave you in a situation where you have more debts to deal with. Sometimes, debt settlement could impact your credit score adversely. You can check your credit score for free with ClearScore.
While opting for debt settlement programs, you need to do a lot of research and background check to steer clear of debt relief scams. While you are desperately trying to eliminate debts, you would certainly not want to deal with an unscrupulous company which makes false promises. You have to be very alert and must have a sound understanding of how the debt settlement process works and what to expect from such a debt management technique. Do not allow any deceitful company to fool you and take undue advantage of you.
We know that it is pretty difficult to deal with previous due debts. In the case, it is not possible for you to pay off the entire loan amount; you have the option of negotiating with your creditors and give them a lump sum payment that is lower than the actual loan amount. So debt settlement implies that you have entered into an agreement contract with your creditors for paying much less as compared to the actual balance due to pay off your debt. For instance, when the credit card issuer is happy to accept just 2000 USD payment on a debt of approximately, 5000 USD, you have successfully settled your debt. Remember when debt settlement is done, it would be projected in your credit report and impact your credit score. It is a good idea to know the repercussions of debt settlement before opting for debt settlement. You must read the online debt settlement reviews for perfect solutions.
How Would Debt Settlement Impact Your Credit?
“If you’re going to have a hard time paying your bills, you should reach out to any debt settlement company you owe funds to before you become six months delinquent on the bill. If you don’t contact a debt settlement agent before this time, the company that holds the debt will generally write it off. This can have serious repercussions on your credit score.”
You must keep in mind that most of your loan and credit obligations are reported every month to directly the credit bureaus. Your credit report shows your account status and indicates if your payments seem to be on time, or late, or if the account has been closed.
In the case of a debt settlement, the creditor would be updating your credit report for demonstrating a status of ‘Paid Settled’ or ‘Settled’. Remember ‘Unpaid’ status is much worse as compared to a ‘Settled’ status. Apart from the ‘Paid in full’ or the ‘Paid as agreed’ statuses, all other payment statuses could be hurting your credit.
Since you are not making the full balance payment as agreed, it is natural for debt settlement to lead to a negative impact straightaway on your credit score. Remember there are numerous factors impacting your overall credit score. As such the exact influence on your credit could be varying as per the other information present on the credit report. Debt settlement has the potential to cause significant impact directly on the credit score.
FICO’s Viewpoint Regarding Your Credit Score & Debt Settlement
Credit scoring organizations do not divulge any details about the way your credit scores are calculated or how certain activities would be impacting an individual’s credit score. In 2009, it was FICO that had launched FICO score loss info that was basically based on a couple of hypothetical clients having different credit scores. In one scenario, an individual having 680 credit score would be losing somewhere between 45 points to 65 points once debt settlement is done for one single credit card. In this context, take the instance of another individual having 780 credit score would be losing anywhere between 140 points to 160 points. Your credit score could go down if you are settling multiple accounts.
Late Payments Just Before Debt Settlement
Debt settlement would be hurting your credit score even more provided the credit cards you are settling, are in good standing and you are settling numerous credit card accounts. Several debt settlement agencies would be advising you to deliberately fall behind your payments. This way, creditors are more than willing to receive a debt settlement plan. If you listen to the advice of the debt settlement firm, it would actually mean missing out repayments for many consecutive months. That may definitely hurt your credit much before settling your debts. The impact of debt settlement would be quite implicit on your credit report for almost the next seven years.
The idea is to opt for debt settlement with the intention of eliminating your debts, especially, when you are unable to afford the full balance. In such a situation, you should be willing to sacrifice slightly your credit score on a temporary basis. Once debt settlement is done, you may concentrate on rebuilding your tarnished credit score. Even if a debt settlement may sometimes, mean a huge blow to your credit report, debt settlement may be effective in resolving many issues. Moreover, you would soon start rebuilding your credit score.