The Truth about Debt Settlement and Your Credit

Misinformation about credit and an incomplete understanding of debt settlement can muddle facts about how this debt relief option can affect your credit score. Fortunately, as consumers learn more about their credit score, and its influence on their financial lives, they want to know how debt settlement could affect it. Financial education and awareness can build a better understanding of the real correlation between debt settlement and your credit.

Debt settlement can be a viable debt relief option for people who cannot manage to repay their debts and want to avoid filing bankruptcy. Many people who qualify for debt settlement already have poor credit because they are, or are about to, fall behind in their payments. For people who have maintained good credit, debt settlement can be damaging. Creditors send your account to their collections department, if they haven’t already, and they may report to the credit bureaus that you are missing payments. It is important to understand your credit may be negatively affected before enrolling in a debt settlement program.

But perception is important. Here are some points to consider:

1. If you are behind on payments to your creditors, your credit is likely already damaged.
2. You may be able to get out of debt faster with debt settlement than with credit counseling and rebuilding your credit may be easier once you’re out of debt.
3. If you are truly in financial distress, your credit may suffer with or without debt settlement.
4. As with debt settlement, other debt relief options can also have an effect on your credit.

If you have great credit and the ability to pay off your debts, you are probably not qualified for a debt settlement program. Otherwise, take a look at the larger picture to balance your desire for good credit and your need to reduce your outstanding debt.

Some people may have specific reasons for avoiding damage to their credit. For example, if you are planning to buy a home in the near future, damaged credit could interfere with your plans. The bottom line is to decide what’s more important: maintaining decent credit with the ability to obtain loans and additional credit, or, attempting to reduce your current unsecured debt.

Debt settlement programs are designed to settle all of your enrolled, unsecured debts, so you can begin rebuilding your credit right after you graduate. Depending on your situation and your goals, temporary damage to your credit may be worth it to get out of debt.

If your credit is your only concern, you may want to consider the bigger picture before you completely rule out debt settlement as a debt relief option. Your present and potential credit standing and your overall debt situation must all be considered before you commit to any debt relief option.