Debt settlement and its effects on the credit score
Every American household, government body and business corporation need a good amount of credit to meet their daily financial requirements. The economy of America revolves around the credit system. This led consumers and large MNCs to borrow without any restraint that eventually led to the financial crisis of 2008. As an after effect to that crisis, several corporations and millions of consumers have piled up huge debt. Now, they are looking for various debt relief options to regain their financial stability. For many debtors, debt settlement is a preferable option get relief from the vicious cycle of debt. Therefore, these people should be aware of the debt settlement process and its effects on the credit score.
How debt settlement works?
Debt settlement companies: You have two options to settle all your debts, first, you can do it yourself and the second one is through a debt settlement company. However, at times it is more effective to work with the professionals who have the necessary experience and qualifications.
These settlement companies negotiate on your behalf with your creditors. They may be successful in lowering the debt amount and other financial obligations like rate of interest, late fees and so on. The debt settlement company collects a portion of the debt from you for a period of about 3 – 6 months. They keep this money in their account till a good amount of cash has been accumulated. Then the debt settlement company puts this accumulated amount on the negotiation table when speaking to the creditors regarding your inability to repay the full debt. This amount stands somewhere at 30-50% less of the actual debt.
However, it’s the creditor’s choice whether or not to accept the repayment package offered by your debt settlement.
Effects of debt settlement on the credit score:
Credit Bureau: Many a time, creditors agree to report to the credit bureaus that you have paid in full. This minimizes the adverse effects of debt settlement on your credit score. Yet, there are few creditors who don’t want to do that and its not legally binding on them. Other information like late payments will keep showing on your credit report for the next seven years. These are some of the bad effects of debt settlement on your credit score.
Credit Report: This report shows a person’s credit worthiness. It one of the first things a lender may ask for before agreeing to offer you the money. So, make sure that your debt settlement arrangement doesn’t show on your credit report after the mandatory seven years have crossed. If the debt settlement still shows on your credit report contact your creditor and ask him to discharge the debts.
Moreover, credit bureaus can also make the mistake of publishing such false or incorrect information. In that case, contact the credit bureaus and request them to remove the record from your credit report. Keep all the payment documents ready to justify your claim. Any discrepancy on your credit report will lower your credit rating by 200 points and it will become very difficult for you to get a new loan in the future.
You can improve you credit score quickly by following an effective budget and developing a good financial discipline.