How will debt settlement affect your credit score?

Outstanding debts giving you sleepless nights! Don’t know what to choose to come out of this never-ending financial rut? Scared what will happen if you file for bankruptcy? Worried about your low FICO score, if you choose debt settlement? As surprising as it sounds, a lot of people are extremely concerned about their FICO score when they decide to choose debt settlement to come out of credit problems.

First of all, how can you enjoy the benefits of a good credit score when you have a huge outstanding debt? And what is the point of having a decent credit score when your overall financial well-being is a total mess? Don’t think of your credit score as a matter of pride and ego. Instead, take it for what it is. A tool used by lenders to determine the risk of lending you money. So if you have delayed a mortgage payment or have abused your credit cards, then your score is not going to be impressive in the first place.

Now you may worry that if your FICO score is already low, then what will happen to it once you go for debt settlement? Will it be further dented? Yes, debt settlement can have a negative impact on your credit score, but it is only temporary. Once you have settled your debts and are careful with your finances, then no one can stop you from basking in the glory of an impressive credit score.

Debt settlement is a process where in you renegotiate your debt with the creditors and repay the revised amount in a fixed span of time. It can take maximum three years for you to be completely debt free. Depending on your monthly income, your expenses and your outstanding debt, the creditors will be willing to renegotiate the amount if they think that you will not be able to pay back the original amount.

So if you are wondering how long you will have to bear the brunt of a low FICO score after choosing debt settlement, then keep in mind that it will completely depend on your sincerity and dedication.  Just as you sort out your outstanding accounts, your credit score will slowly and steadily continue to rise.

There are, however, some tips you can follow to resurrect your credit score during the process of debt settlement:

  • By all means do not miss any monthly payments. This will not only hamper your credit score, but also give a chance to future lenders to reject your loan application. Make it a habit to pay the monthly installments at the beginning of the month, instead of paying after completing your other obligations.
  • Once you have paid off a particular account, inform the agency about the zero balance by sending in proof of payment. Do not rely on your creditor to send the updated status to the agencies. The faster you send the updates to the agencies, the sooner it will reflect on your credit report.
  • Remember that once you have cleared all your dues, within one year you can actually acquire a good credit score (above 600).

While completing the procedure of debt settlement, remember to be consistent. Bear the discomfort of monthly payments and put up with a low credit score for a while; once you are debt-free, you will not regret it! If you qualify for debt settlement, do not make the mistake of missing out on payments. As debt settlement gives you the opportunity of paying less and getting out of debt quickly. It is a good idea to do it under the guidance of experts, who have the knack of negotiating with banks and creditors.

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