Typically the biggest credit drop does not come from the settlement of your debt. It comes from the activity prior to the settlement of the debt. First of all, a lender is not going to be willing to forgive a portion of your debt to them unless they feel they might soon be included as a creditor in a bankruptcy and they run the risk of getting nothing. So typically the strategy before you try to settle your debts is to fall behind. This is never recommended UNLESS you truly are seeking a bankruptcy alternative or you truly have exhausted all other avenues for keeping the debt in good standings. When the debt falls behind that will cause the first drop to your score. While the debt is in default the creditor will start to add late payment records to your report. Remember, FICO uses payment history to calculate 35% of your credit score. The next thing that could hurt you is if the account is turned over to a third party collection agency. When this happens the creditor will close out the debt, mark it as “transferred to another lender” and then the collection agency will create a new trade line in their name. This will make futures creditors feel that there are more negative records then the actual scenario.
This is an extreme scenario and not usually the norm. Most people who are entertaining settling a debt have already fallen behind. They have taken the maximum impact to their score. Paying off the debt at this point and having a portion forgiven will not have a negative impact. At this point a consumer should try to save as much money as possible to bring their financial situation back in order. Remember, the creditor at that point has usually collected years of interest, fees and merchant fees. Also, your credit card company has probably sold the debt to the collection agency for ten cents on the dollar and the other 90 cents has been placed on their tax return as a loss. This allows them to reduce their taxable income expense.
Let’s sum things up. Settling a debt is a great idea. Save your money. But, only if you’re fallen behind or you are entertaining bankruptcy.
If your debt is up to date try and work on a payment plan at a reduced interest rate so you will not take a credit drop.
Feel free to contact our office for a FREE debt analysis. Credit Repair is serious business.