How Does a Debt Settlement Plan Affect Your Credit Score

The objective of a debt settlement plan is to write-off debt and improve affordability. Financial difficulties place a great strain on the health and well-being of many U.S. families so identifying a way to tackle them is extremely important. However, the use of a debt solution will have a negative effect on your credit score because it involves either a modification or breach of the terms of a credit agreement. Whilst a reduced FICO score is not desirable, affordability is far more important for all parties that are involved.

What is a Debt Settlement Plan?

This debt solution involves negotiating with creditors in order to reduce monthly repayments and clear personal debt. This is primarily achieved through a write-off up to 50% of unsecured debt (credit cards, medical bills etc). An affordable payment is then made over a period of 12 to 36 months; the remaining amount owed is then written-off. It is possible to increase the term to 48 months, but this is not advisable as it increases the probability of creditor litigation. Further legal action, collection agency activity and a reduced credit score should be avoided at all costs.

How Your Credit Score Will Be Affected

Whilst the benefits of a debt settlement plan are clear, it is important to understand how this debt solution affects your FICO score. On the one hand, it improves because the reduced amount owed improves your debt-to-income ratio. The problem is that defaulting on the terms of a credit agreement will show on your credit report for a period of 7 years. However, keeping-up with future repayments will mean that your credit score can start to recover in as little as 6 months.

Have You Already Defaulted on a Credit Agreement?

The majority of those who enter a debt settlement program have already missed or made late payments on credit agreements and are being pursued by collection agencies. Those who have already defaulted on the terms of an agreement will have a poor credit score. If you are struggling to keep-up with repayments, there is a high probability that you will shortly default in any case.

An imbalance between income and expenditure needs to be tackled quickly. If saving or making money is not possible, a debt settlement plan is likely to provide the answer. Your credit score may be affected, but only if you have an exemplary credit history.

Related Articles:
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Pros and Cons of Debt Settlement Plans
How to Choose a Debt Settlement Company
Debt Settlement Help Means Legal Credit Card Debt Elimination
Do Debt Settlement Programs Reduce Credit Card Debt?

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.