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Your credit score can tremendously impact your day-to-day life.

For Example, your credit score can affect everything from obtaining a mortgage to getting a new job. This is something that most people know. But what everyone doesn’t know is how exactly your score is calculated.

The reason that this isn’t common knowledge is because the credit bureaus do not tell you exactly how they calculate your score.

Even though we do not know the exact equations used, we do know what factors can have a tremendous impact on your credit score. For example, settling your debt can impact your credit score.

Let’s see exactly how debt settlement affects your credit score…

What is Debt settlement?

In order to determine how debt settlement affects your credit score, we first have to understand what debt settlement is. Generally, debt settlement consists of negotiating with the creditor in an attempt to get the creditor to agree to:

  1. a reduced balance, and/or;
  2. a different repayment terms.

Basically, the goal is to negotiate a reduction of the total amount that the creditor is claiming due and terms of repayment that work for your individual financial situation.

Debt Settlement Credit Score

Creditors understand that it can be very difficult, and costly, to collect on past due debts, so in many cases they are willing to negotiate with you. Once a settlement is reached, and the terms of the settlement have been satisfied, the creditor will, or at least should, report this information to the credit bureaus so they can update your credit report.

Once the terms of the settlement are satisfied, the creditor should also provide you with a settled in full letter. This letter is very important as it acts a proof that the account has been resolved.

Many consumers are unaware that they can attempt to negotiate with creditors when in fact debt settlement can be one of the most useful tools you can use to help get yourself out of debt. However, in order to make an educated decision, it is important to know how debt settlement can affect your credit score…

The Impact of Debt Settlement on Your Credit Score

Your credit score is usually severely impacted when an account goes unpaid. That negative impact will continue until the delinquent account is resolved. If you decide to settle a delinquent account, and are successful doing so, then your credit score will improve.

The reason your score is positively affected is because settling the account removes it from delinquency status demonstrating to the credit bureaus that you have resolved, or in the process of resolving, the debt. However, it is important to note that it will not have as much of a positive impact on your score as if you paid off the account in full.

For Example: Say that you have one delinquent account for $3,000.00. If you settle the account for $1,250.00, then you will be relieved from paying the balance of $1,650.00, and your score will increase. However, if you paid the entire $3,000.00 then your score would increase more than it would if you settle the case for less than the current balance that the creditor is claiming due.

These numbers are just an example and cannot be concretely determined because everyone’s situation is different.

Your situation may yield a higher increase in your score or lower, it differs for everyone. But the general idea remains the same, if you pay off every dime of what you owe then your score will increase more than if you settle the account for less than the full amount of what the creditor is claiming due.

But it is up to each individual to decide what is more important; a minor impact on your credit score, or saving as much money as possible. Often times, many consumers and a large percentage of our clients prefer to save hundreds, potentially thousands, of dollars and that can live with giving up a few points on their credit score that would be added if they paid the account in full.

Stay Current With Your Payments!

Bottom line, it is important to remember that settling any delinquent account will improve your score, but as not much if you paid every dime owed on the account.

The negative impact of your account going into default will be significantly greater than the positive impact of settling an account. Therefore, the best way to keep you credit score high is to make all payments on time and not allow any accounts to default.

But if you have an account that is delinquent, then you must decide what is more important to you, your credit score, or saving money. If saving money is best for your individual situation then you should discuss a potential settlement with your creditor.

Everyone’s situation is different so it is important to weigh the pro and cons of debt settlement and its impact on your credit score before deciding what option is best for you.

Photo Credit: Sean, Chris

About the Author:
Adam Black, Esq., is a graduate of Bloomsburg University of Pennsylvania where he received his B.A. in Political Science. While attending Bloomsburg University, Mr. Black was a member of the Political Science Student Association and Phi Sigma Alpha, a national honor society.

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