How Will Debt Settlement Affect Your Credit
By Caitlin in Debt
Sometimes when people are in deep consumer debt, they frequently resort to drastic measures, such as bankruptcy (read about how to file for bankruptcy in Canada, here). Unfortunately, this is often the case simply because they are not informed enough about the other solutions and options available to them. Keep in mind that in certain situations, people have so much debt that they must resort to bankruptcy as their only solution. If this is not the case for you then there are other options you must consider first.
This being said, it is extremely important to remember that you’ll want to choose the option that is both the best choice for you and that will affect your credit score the least. Bankruptcy is actually the most damaging debt solution to your credit score. Therefore it’s a smart choice to evaluate all the debt solutions available to you and how they will specifically affect your credit.
Of course not all debt solutions are created equally, and each comes with varying degrees of damage to your credit score. If bankruptcy has the most negative effect on your credit score, then on the other side would be credit counselling, with a far less damaging outcome to your credit score. But when credit counselling is quite enough to help you conquer your debts, there is debt settlement.
Trying to decide what debt management option is best for you? Check out this infograph.
Debt Settlement 101
Put simply, the goal of a debt settlement program is to help you settle your debt for less than what you actually owe. This option is most desirable for those with a debt greater than $10,000 but not great enough to warrant using methods as extreme as a consumer proposal or bankruptcy. Enlisting the help of a professional is a good way to figure out whether or not debt settlement is your best option.
When deciding whether or not debt settlement is the best option for you, keep in mind that you’ll need to make one lump sum payment to your creditors. Installment payments aren’t typically an option; therefore it’s advantageous for you to start saving as soon as possible.
Debt Settlement and Your Credit Rating
The amount that a debt settlement will affect your credit is almost completely reliant on your particular situation. What you want is for your creditor to write off a high amount when settling your debt because this will have less of a negative impact on your credit rating. Because this high write off from your creditor is very important, it is always a good idea to have a professional debt settlement provider negotiate on your behalf, as opposed to doing it yourself (although do-it-yourself debt settlement is always an option). The debt settlement company that you choose to work with will analyze your situation and should try to provide the best offer for your credit score. This offer should be enough to satisfy creditors, but at the same time still leave you in a financially comfortable position.
If you are, or have had trouble making debt payments, then you are very likely aware of the negative impact these late fees and charges have on your finances and debt total. Debt settlement will not clear your credit report of late payments, but it will help prevent you from receiving any more late payments on the debts that you currently have what are pass due.
Seeing the Big Picture
The immediate result of a debt settlement will lower your credit score; this is probably the biggest downfall that you’ll have to decide whether or not is worth it. But the good news is that you and your credit score will greatly benefit from debt settlement in the long run.
- Your debt-to-income ratio will lower, which is great for your credit score.
- You’ll stop adding more and more late payments to your credit report which is also great for your credit score.
- The sooner you settle your debts the sooner you can start rebuilding your credit score and the sooner you’ll be able to take advantage of other financial products like loans with lower interest rates.
It’s important that you look at debt settlement as a long term solutions that will help you become debt free now, but that will also allow you to work towards a better financial future.
Get Help and Get Started
The only way you’ll truly know whether debt settlement is right for you is if you sit down with a specialist to discuss your financial situation and the options available to you. Check out our online application today or speak with one of our debt specialists.