My OperaHow Will Debt Settlement Affect Your Credit Score Part One
Monday, June 7, 2010 8:13:52 PM
If you are offered a settlement by a credit card company or a debt collector that is affiliated with the credit card company, how will it affect your credit history? If you agree to a debt settlement program, and pay back a loan for less than what you initially borrowed, your credit score will drop substantially.
The name of the debt settlement game is to allow struggling debtors to pay back their outstanding loans for less than the original debt. Unfortunately, taking this route out will cause your FICO score to drop by up to one hundred and twenty five points, and you might even have to face a big tax bill. The good news is that there may be better options out there, and with the help of an adept credit counselor, you can sort them out.
Debt settlement not only impacts your credit score, but your wallet as well. If the card issuer, or affiliated debt collector takes your smaller repayment, it will show up on your credit report and impinge on your ability to borrow for seven years from the original delinquency date of the debt. During these loooong seven years, your lowered credit score could mean a harder time juggling your finances, getting denied for apartment rentals, difficulty borrowing money, and even missing out on job opportunities.
To add insult to injury, because the IRS sees forgiven debt as income, a settlement could end up costing you come tax season, making debt settlement an expensive choice. Still, settling debts for less than originally agreed will most likely hurt your credit scores at first, but doing this can reduce your debt load and allow you to start reducing other debts that you may have.
With time, your credit scores will begin to get better. But, if you do make the choice to go through a settlement, you should not agree to anything over the telephone. Get the contract in writing and look through it carefully before you sign. To Be Continued In Part Two...
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