Will settling credit card debt hurt your credit?

Are you wondering if doing a credit card debt settlement will hurt your credit score? Unfortunately, more and more people are finding themselves in a situation where they cannot pay their bills. This year has been a tough year for hundreds of thousands of people as they have faced unemployment, losing their homes, not being able to afford health insurance and more. With everything that people face during tough times, it is not uncommon for credit card payments to be shoved to the side so that bills such as the electric bill or buying food can be achieved.

However, in most cases the time comes where new jobs are found and money starts to come in again. These people will start assessing the damage occurred during times when money was so tight. In most cases they will find that their credit card debt has been transferred to collectors, which means that they are no longer able to pay their credit card companies directly to their initial creditors.

The unfortunate part of having your credit card or cards turned over to a collection agency is that they are now reporting negatively on your credit report. Of course, they were reporting negatively before, as soon as you stopped making payments, however, now that it has been turned over to a collection agency, the credit card company has established that they do not believe that you are going to pay back your debt and were willing to sell the debt to a collector for a fraction of what you owed them.

Some collection agencies can be difficult to work with. Many have unrealistic expectations from those that owe them money. Many are willing to accept monthly payments for the debt owed, but only if a certain percent is paid up front. This amount can be 10% to 20% depending the company and the amount that you owe to them. Once you start making payments, however, this will be reported to the credit reporting agencies and you will be taking the first step towards fixing your credit.

That is not the case with all collection agencies, however, and many will work with you extensively while others will make you offers to help you eliminate your debt at a lower cost (called settling your debt). They are not doing this because they are kind people looking out for your best interest; they want to make money from your debt. That is the nature of their business. However, the fact that they want to make money often makes them more flexible about how they are paid. Settling your debt is just one of those way.

How Debt Settlement Works

There are generally two ways that debt settlement works. First of all you may receive a notice from a debt collector offering you the opportunity to pay off your debt in one lump sum for less than what you owe. This offer could also be available in monthly payments, typically three months, depending on the company that is offering the settlement. In addition, monthly installments are typically available when you owe a very large sum of money. In most cases when a monthly payment is offered for debt settlement, the first monthly payment will cover the debt collector’s investment in your debt. This does not mean that you should not pay off the balance, this debt will still report as a negative on your credit report until it is paid off.

The second way that debt settlement works is that you can try to get a creditor to settle with you. Many people will hire professional debt settlement attorneys to help them with this process; however, this is not necessary, anyone can negotiate their own settlement, you should be completely prepared with all of your information before you attempt to settle your own debt.

Debt settlement will negatively affect your credit, at least for a while. It is kind of a mixed bag. Debt settlement means that you have paid less than you owe on the debt, this is a negative. However, paying off your debt is a positive, so this payoff will have a much less negative effect on your credit than if you choose not to pay your debt.

Things to Consider Before You Settle a Debt

The first thing that you want to consider before settling your debt is how old the debt is. While we are not recommending that you leave your debts unpaid, if you have a lot of debt that you need to pay off and your debt is close to or over seven years old, you may want to consider letting that debt be. After seven years that debt will no longer affect your credit report and you will want to focus on the debt that is hurting your credit.

The next thing that you want to consider is whether or not you can pay the debt off full. Paying in full means that your payoff has no negative connotations. However, if you have a lot of different credit card debt that you want to pay off and you do not have the money to pay off everything in full, then you will want to go ahead and negotiate a settlement for as many of the credit cards as you can.

You should never agree to allow automatic withdrawals from your checking account. If a company says that this is the only way that they will agree to a settlement, you should take a pass. Automatic withdrawal will occur whether you have the money or not and collection agencies will not delay a payment withdrawal even if you call them and ask them to delay the payment.

You will also want to ensure that you get a letter from the debt collector agreeing that you have paid off your debt to their satisfaction. It is an unfortunate truth that many collection agencies will try to collect on the balance of your debt, even after a settlement is agreed upon. Others do not properly document your payments, which could lead to more letters and phone calls from the company. Additionally, that letter will ensure that if they company does not remove the debt from your credit report, you have a way to ensure that the credit reporting agencies remove it for them.

Lastly, always check your credit report thirty days after you pay off a debt. If the debt is not gone, file a report with the credit reporting agency (or agencies) to dispute the debt. You need to stay on top of this so that your credit can start repairing itself.

Re-Establishing Your Credit

Now that all of your debt has been paid off, it is time for you to start rebuilding your credit. This is going to be a slow process as much of your negative items will take time to stop affecting your score. You will need to get a new credit card or a loan and start making regular payments so that you can establish your credit once again.

You will find that it will be much more difficult for you to get a loan than ever before and you may have to use non-traditional sources. You should always ensure that the lender reports to the credit reporting agencies or there is not point in borrowing the money.

If you want to reestablish your credit by getting a new credit card, then you will want to use our card chaser tool to find the right credit cards. Unfortunately, with a poor credit history, the types of cards you will qualify for are limited. Rather than trying to find the right credit cards for your situation, you should allow our credit card chaser tool find it for you. It will make the process of finding a new card much faster and easier. What’s more, you will find that you will experience much less stress using our free chaser tool.

If you are ready to reestablish your credit, you want a new credit card or you have never had credit before, or credit card comparison tool is the perfect method for you to find your new card. There is no obligation and our tool is free and easy to use. Why not try it to find the best credit card for you today?

Similar Articles:

Credit Cards

Disclaimer: This content is not provided or commissioned by American Express, Visa, MasterCard, Discover, or any other credit card company or issuer. The opinions expressed here are the author's alone, not those of any credit card company or issuer, and have not been reviewed, approved or otherwise endorsed by any credit card company or issuer. Credit Card Chaser may be compensated through various affiliate programs with advertisers. As always, Credit Card Chaser is an independent website commmitted to helping people research credit card offers and find the best credit card!