How Debt Settlement Impacts Your Credit Score
In this article, we will explain how debt settlement may negatively impact your credit score and provide credit score simulations.
How would your credit score be impacted? Take the debt settlement calculator below to compare your options and understand pros and cons. We can also run a credit simulator for you.
Introduction
Debt settlement (or debt relief) can be a great way to achieve debt freedom when debt becomes unmanageable or when an unexpected financial hardship occurs. Most people that enroll in a debt settlement program realize that they need some sort of debt relief, so they understand that their credit score will be impacted negatively, but the extent of that is unclear.
Just as a note, debt settlement is not for those who are looking for a quick out to their debt, but is an avenue for those who would like to avoid bankruptcy and know that the credit score will be negatively affected regardless. Debt settlement might be or might not be a good option for someone with an 800+ FICO score as well as a 570 FICO score, but it really depends on each individual situation.
In this article, we will present specific examples of how debt settlement may affect your credit score and give insight into how you and Ascend can mitigate these negative effects. We also recommend reading debt settlement pros and cons and how to determine whether a debt relief company is legitimate before signing the dotted line.
How does your Credit Score work?
I won’t go into too much detail, as the goal of this article is to get into the specifics of how debt settlement affects your credit score. I do want to provide a quick overview of how Credit Score works. Fair Isaac and Company (FICO) does not provide the exact details of how the score is calculated, but they do provide the weights of the criteria as follows:
Debt Settlement Credit Score Impact
Debt settlement impacts your credit score differently based on your starting credit score. A credit score of 730 could drop to 535, 630 could drop to 545, and 505 could drop to 470 based on FICO score simulations. Debt settlement stays on your credit report for seven years. Run a credit score simulation.
Many folks ask us, “How will debt settlement impact MY credit score?” We can get into some scenarios later, but this is a challenging question because the impact is made up of the following factors:
- The current condition of your credit: If all your accounts are currently in good standing, the debt settlement will have more of a negative impact vs. already being behind on all your payments.
- Reporting practices of your creditors: Some creditors do not report, some report only to one bureau, etc. This will affect how your credit score is impacted.
- Size of the debts being settled: Larger balances tend to have a larger impact on your credit score. If you settle on smaller accounts and are current on larger accounts, the score effect may be less adverse.
- Credit Report Account Status: On your credit report, there can be a notation of “Paid-Settled." This is generally better for your report than “Charge-Off," but it obviously does not look as good as “Paid In Full.”
A Simulation of How Debt Settlement Impacts Your Credit Score:
We would love to run a simulation for your specific situation, but in this article, we will observe three hypothetical scenarios using the FICO simulator found from the consumer division of FICO where the entrant in the debt settlement program has good credit, fair credit and poor credit as defined by Experian. We hope this gives you the most accurate projection of the dip level. As stated above, each score is different, so this is a simulation and actual results may vary. Please also note that these are ranges, so it's possible to dip from the highest range to the lowest range.
Good Credit (670-739) - Credit Impact Range
Fair Credit (580-669) - Credit Impact Range
Poor Credit (<580) - Credit Impact Range
How does a reputable debt settlement company help mitigate this negative effect?
Some debt settlement companies are not legitimate, often pitching only the pros of debt settlement and not necessarily the cons of debt settlement. You may want to check out this article, "Are Debt Relief Companies Legitimate?" to help you decipher who to work with.
Why does this have anything to do with credit score? The reason is that a good debt settlement company will help make sure that you are helped throughout the process instead of just trying to sign you up and then leaving you to get the next sale. Ascend has only found a small handful of debt settlement companies who we would be comfortable referring to folks.
So, what does a good debt settlement do to help mitigate the negative effects of credit score?
- Credit Report review: Throughout the program, your personal advisor will review your credit report for you. All our advisors are well-versed in credit reports, how to find potential inaccuracies, and discovering other areas that are being negatively affected.
- Credit Report estimates: We can provide free estimates along the way of where your credit score will be once you finish the debt settlement program.
- Credit Report repair resources: We will show you how to dispute incorrect items on your credit report for free. During the latter half of the program, we will work with you specifically to rebuild your credit score. If we are unable to offer our free help, we do have vetted, low-cost credit repair providers that we can direct you to.
Can you run a debt settlement credit simulation for me?
We would be happy to see how your credit score may be impacted. All you need to provide is to go through the debt settlement calculator below and click "Analyst Review". We will then reach out to do a credit score simulation for you.
Debt settlement can be an excellent way to get out of debt and achieve financial freedom even if the credit score is temporarily negatively affected. Whether it's best for you depends on each individual as everyone comes to the table with different experiences and goals. Generally, we decide what's best based on a combination of your goals and preferences, mathematical equations of your income and expenses, and a full understanding of what will save you the most money and allow you to best achieve debt freedom.
Is Debt Settlement right for me?
You may be wondering how other forms of debt relief such as debt management or bankruptcy would affect your credit score. These are great questions that should be explored. Ascend specializes in each of these debt-relief options, so if you take the debt settlement calculator and click "Analyst Review" at the end, we'd be happy to do a free review of how each of these options may impact your credit score.
Regardless, before signing the dotted line for debt settlement, we would always recommend comparing each of your options holistically to make sure that you are getting into the right option. When we started Ascend, we realized that there were far too many people getting misplaced in the wrong debt relief option because they did not consider each of the options holistically beforehand.
While you can get replaced in the right option, you may have spent a year or two years in the wrong option before moving over, making debt relief longer than it needs to be. Here are some recommended readings to help you understand what's best for you:
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