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By Jackson Maven
Special to the Financial Independence Hub
“Debt,” though a small word, has a deeper impact. Settling debt makes people worried and sometimes may even disturb their entire finances. There are numerous ways by which one can settle debt, but the concern remains to find a way that would not cause any negative impact on Credit.
This article we will discuss ways in which the debt relief plan may affect your credit.
1.) Is Debt Settlement a good idea?
Debt settlement may cost a fortune for some; whereas, others may end up paying less than what they owed.
Non-payment of credit-card bills or other amounts due to the creditors for six months or more, worries creditors. In such a situation, you can make a debt settlement offer to your creditors. Here you can offer to pay the minimum amount that you can easily pay, against the total amount due. If your creditors want to close your account and are looking forward to getting whatever amount possible, they might accept the offer. On the contrary, if they demand full repayment, they may either transfer your case to a collection agency or may even take you to court.
2.) A few things to remember
Debts constitute a third of the credit score. Paying off debts helps in improving this part of the credit score. Impact of debt on the credit score depends on many factors. Hence, if you want to know the impact of debt on your credit score, you need to have a complete understanding of your credit history. Based on this, you can select the debt relief option that has the least impact on your credit score. Hence before selecting the credit relief option, a credit check is a must.
3.) Credit Utilization Impact
Credit utilization = Ratio of Pending credit card payment/Total Credit Card Limit *100
Lower ratio of credit utilization is always welcome. Higher credit utilization ratio results in lower credit score. In addition to this, it also reflects that lending you money can be quite risky as you are already overextended.
Debt Relief Options
i) Counselling
You can opt for credit counselling. In this, you can discuss your debt situation with a professional counsellor. A counsellor can advise you the best way to pay off your debts. The best part is these counselling sessions would have no impact on the credit score. But, if your counsellor registers you in a management or repayment plan, then that plan may have some effect on your credit score.
ii) Debt settlement/negotiation
In some cases, creditors agree to negotiate with the debtors. They may allow debtors to settle the debt by paying an amount that is less than the total repayment amount. This generally works for those who have a history of not making payments on time. Also to be noted, most creditors may report such settlements, and it would get added in the credit report.
iii) Debt management and debt consolidation
Another way of paying off multiple debts is to consolidate them and pay them by taking a new loan. It acts as a tool which can help you in settling your debt faster. However, you still need to clear your new loan.
iv) Bankruptcy
Reporting bankruptcy causes severe damage to the credit score. It stays in the credit report for 10 years.
4.) Late payments preceding Debt Settlement
If you have been a defaulter as far as late payment is concerned, then it would have more a negative impact on your credit score. To increase the chances of debt settlement, debt settlement companies advise their clients to opt for late or no payments deliberately. The strategy aims to make creditors believe you are incapable of clearing your dues. Remember, if you agree to follow this strategy, be ready to face the damage it will cause to your credit report.
5.) Rebuilding your credit after Debt Settlement
Debt settlement is all about clearing the burden of debts from your shoulders. By opting for debt settlement, you are ready to take the risk of spoiling your credit report. But it could be beneficial if you are looking forward to applying for a new loan.
Once your debts are settled, you should immediately start focussing on improving your credit score. Timely payment of your dues and a responsible borrowing would help you in rebuilding your credit score.
6.) The Bottom Line
Irrespective of the debt settlement method used by you, the aim is to pay off your debts. There is a chance that you might end up spoiling your credit score, but it might be worth trying as it would relieve you from stress and also would bring your balance to zero.
Focused on providing information for anyone in need of debt relief, Jackson writes a blog on debt settlement, debt consolidation, tax debt relief and student loan debt which helps to find the debt solution that fits their unique needs no matter the amount of debt they are in.
