How Will Debt Settlement Affect My Credit Report?What is Debt Settlement? Debt settlement can be simply described as paying less than is owed on a credit balance with an agreement between you and the credit card company that the debt is “settled.” For example, if you have a $7000 balance, an agreement can be reached to pay off $5000 of the debt and “settle” the rest. Each settlement is negotiated differently, based on principal balance, past due status, your personal financial situation, and other factors. Using the services of a debt settlement agency can help to insure that you get the best deal possible.
Why Would I Want To Settle Debt? Settling allows you to pay off a smaller amount of the credit card debt, thus freeing up savings in your budget. It gives peace of mind in knowing that the account is closed and settled. Settling a debt allows you to free up cash in the budget to focus on paying off other debt or rebuilding savings. Finally, settlement is generally a better option than bankruptcy when considering the impacts on your credit score. One thing to consider is that any amount settled (in the case above, $2000), must be included on your tax return at the end of the year as taxable income. In general, however, the benefits outweigh the cons. How Will Debt Settlement Affect My Credit Report? To be very clear, debt settlement will negatively impact your credit score. However, the decrease in your score will not be as severe as filing for bankruptcy or even simply stopping paying your credit card bills. Debt settlement will show on your credit report as not paying the balance in full, but is a better option than simply not paying any of the balance, as occurs in bankruptcy. Debt settlement should be used only as an absolute last resort. A credit counseling agency can assist you in analyzing your personal situation, debt structure, and determine exactly what is best for you.
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