Your credit score is important, and if you’re like many Americans, you may be faced with unpaid debts now or in the near future as a result of COVID-19.
Unpaid debt doesn’t require much of an explanation: it’s simply a debt that has not yet been paid. We previously discussed the dangers of unpaid debt and how it affects your credit, but what about your other options like debt settlement? Below, we will explore what debt settlement is, and how it can affect your credit score in the long-run.
So, what is debt settlement?
Debt settlement is an agreement made between a debtor and a lender when it seems unlikely that outstanding debt is going to be paid in a reasonable amount of time. Through the agreement, the lender allows the debtor to pay back a portion of what debt is owed, rather than the full balance. Instead of marking the account as “unpaid,” the lender will mark it as “settled”, removing the debt as if it were paid in full. It seems like a win-win for both sides—the outstanding debt goes away for less, and the lender gets a portion of the money they are owed in return.
However, before you begin negotiations, it is important to understand the potential impact that debt settlement can have on your credit.
Because credit scores are designed to reward accounts and individuals that have paid their debts on time as outlined in their original credit agreement, a debt settlement plan—in which you agree to pay back a portion of your outstanding debt—negates the original credit agreement. While the money is no longer marked “in collection”, this still leaves a negative impact on your credit score. The extent of the impact depends on several factors, such as your current credit score, the size of the debt being settled, and more. The impact is hard to predict; in fact, stronger credit scores are often hit the hardest by debt settlement cases.
Regardless of how it affects your credit, debt settlement typically remains on a credit report for up to seven years. Of course, there are ways to rebuild your score by making your payments on time and borrowing wisely. However, the risk is there, and you should always consider all of your options before making negotiations with your lender.