What Debt Settlement Means for Your Credit Score

APR 12, 2012

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Its safe to say no one really feels good about having a lot of debt. On top of the financial impact of high payments, which drain your resources, being deeply in debt can weigh you down mentally. When youre in that situation, its normal to want to find a way out the easier and faster, the better.

You may have heard the term debt settlement  and wondered if it could be the solution to your problems. Debt settlement is a major financial move and it will definitely impact your credit score. You need to ask yourself if debt settlements impact on your life and your credit score will be less harmful than continuing to struggle with unmanageable debt.

Only you can answer that question, but before you do, make sure you know some important debt settlement facts.

Fact 1 ‘Debt settlement’ is not the same as ‘debt consolidation’ or even ‘debt management’.

Debt consolidation is when you roll multiple high-interest debts into a single loan at a lower interest rate, which saves you money in interest costs but doesnt reduce the principle of what you owe. Debt management changes neither the principle nor the interest, but establishes a plan for paying off debt. Debt settlement is when a creditor agrees to allow you to pay less than the principle you actually owe, most likely because they realize you will never be able to pay the full amount.

Fact 2 Debt settlement is not a get-out-of-jail-free  card.

You will still owe some money, just not as much as you originally borrowed. Youll also pay for debt settlement in other ways namely in the form of a lower credit score, which  can make it more difficult to obtain credit in the future, or at the very least to obtain good terms on future credit. Future creditors will view your participation in debt settlement as an indicator that you may not make good financial decisions in the future and may be less likely to repay debts.

Fact 3 Not all debt settlement companies are out there to help you, and even the ones that do help will likely charge a high fee.

Before you sign on with a debt settlement company, investigate it thoroughly, just as you would any other company you hire. Check out government resources such as your state attorney generals office and ratings organizations like the Better Business Bureau to see if the company has any complaints against it.

Fact 4  The most important thing to remember about debt settlement: Unless you change the habits that got you deeply in debt in the first place, debt settlement is nothing more than a temporary ”and costly ”fix.

If you choose the route of debt settlement, you also need to learn how to better manage credit so that you dont end up back in the same situation in the future.