How Does a Debt Settlement Plan Affect Your Credit Score

The objective of a debt settlement plan is to eliminate debt and make your monthly repayments more affordable. Financial difficulties place a huge 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-free solution will have a negative effect on your credit score because it involves breaching the terms of your credit agreements. While a reduced FICO score is not desirable, affordability is far more important for all parties that are involved. Besides, most of the people who enter a plan have already transgressed the terms of credit through non-payment.

What is a Debt Settlement Plan?

This debt solution involves negotiating with creditors in order to reduce monthly repayments and clear debt. This is primarily achieved by eliminating up to 50% of unsecured debt. An affordable payment is then made over a period of up to 36 months, and the remaining money is written-off. You can increase the repayment term, but it's inadvisable because it increases the likelihood of creditor litigation.

How Your Credit Score Will Be Affected

While the benefits are clear, it's important to understand how your FICO score will be affected. On the one hand, your score will improve because you'll owe less money. The problem is that defaulting on the terms of your credit agreements will be recorded on your credit report for 7 years.

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Have You Already Defaulted on a Credit Agreement?

The majority of people who enter a debt settlement program have already missed or made late payments on credit agreements and are being pursued by collection agencies. If you've already defaulted, you'll have a poor credit score. If you're struggling to keep-up with the repayments, you may just be delaying the inevitable.

An imbalance between income and expenditure must be tackled quickly. If saving or making money isn't possible, a debt settlement plan could provide the answer. Your credit score may be affected, but not nearly as badly as you might think.

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.

Updated: 30 April 2011