Settling a Debt and How it Affects My Credit Score
Nothing is worse than owing a debt and knowing you have to wait to pay it off due to the lack of finances. It builds up and the stress can eat at you. If there is an outstanding debt, it is a good idea to try and resolve it with the creditors and debt collectors as quickly as you can. These creditors might be willing to work out a repayment plan or a settlement of the debts for less than what you owe. If this be the case, will settling for less than what you owe cause more damage to your overall credit score?
This isn’t the answer you want, but yes, it will.
Barry Paperno, credit report expert and blogger at Speaking of Credit stated, “generally speaking… paying in full as soon as possible is the best action to take terms of… preserving the credit score.”
If you settle the debt, it will contrarily have a negative impact on your credit score.
“The precise impact of a debt settlement on the score will depend on how this specific information is reported to the bureaus as well as on the remaining information on the credit report,” major credit scoring model FICO said in an email. “FICO research on millions of credit files has found that consumers who do not pay off their loans per the original terms of the agreement represent higher risk to lenders, and as such, if the debt settlement is reported in the credit file with an indicator that the account was paid for less than the full amount owed, that can be viewed as a derogatory indicator by the score.”
An Admonition To Consider
With this concept of settling a debt damaging your credit score, it’s not to say that this isn’t the best action for you take. Unfortunately, many creditors or debt collectors will take further adverse action against you if you stall the resolvement. They might charge off your debt or resell the account to a collection agency. Both collectors and creditors have the right and means to ultimately sue and secure a judgement against you in order to get the full repayment back for the debt.
There are newer credit scoring models, such as the FICO 9, that actually ignore paid and settled collections. These scores are yet to be in universal use, but there is still a likely chance that your collection will cause more damage to other aspects and scoring models of your credit score.
Debt can be resolved in advance ofa judgement being filled, which could in turn prevent a more adverse impact to score which might occur if an additional judgement is posted to the file of credit.
Translated, Paperno says, “damage control… ie. paying as much as you can as soon as you can.” This needs to be the highest priority for consumers in looking to resolve these unpaid debts, he suggests.
This can be an overwhelming process and cause a significant amount of financial and emotional stress. If you are facing a situation like this, first, ask the creditor or collector through a letter or email, how they plan to report any settlements they are offering to the 3 major reporting agencies. Making sure you have it documented whether on paper or email is crucial.
Jeremy Davies, credit professional withCredit Perfection states, “Make sure you get it documented! You need proof, otherwise they may not fulfill theterms you have discussed.” He goes on to explain how many clients he has seen that forget to do this and end up not quite getting their end of the bargain.
There are times and circumstances in which the creditor will be willing to negotiate and settle according to your needs. Once you have the written confirmation and documented negotiation terms, keep an active eye on your credit reports to make sure they held up your end of the deal.
Finally, if you notice that the debt is being reported inaccurately, then you may file a dispute with the credit bureaus. That is why documentation and proof is needed. By visiting creditperfection.org, you can request your credit reports and other important information regarding your credit score.