How Debt Settlement Affects My Credit Rating

We've all seen the ads — "cut your debt by up to 60%!", "find out the information the credit card companies don't want you to know", "stop creditors harassing you and pay only a fraction of what you owe!". Sounds too good to be true? Well guess what... it is.

Most of these firms operate under the guise of 'credit counselling', when in reality what they are doing is selling debt settlement, wherein they collect a fee (generally a percentage of your debt) to negotiate partial repayment of your debt with your creditors. Well that doesn't sound too bad on the surface does it?

The problem is, surprise surprise — it can totally ruin your credit rating.

Credit Counselling

Credit counselling has been around for decades and exists to provide consumers with strategies to effectively manage their debt. Many of these agencies operate on a not-for-profit basis and can definitely help with budgeting advice, education on managing credit card debt, and strategies on becoming debt free. These are legitimate services and are well worth looking into should you find yourself having debt problems and uncertain of where to begin addressing them.

Debt Settlement

Debt settlement is, as described above, the process wherein an agency acts on your behalf to communicate with your creditors and negotiate a payment plan for a portion of the funds owed in return for wiping the slate clean in terms of your debt. Sounds great right?

The problem arises with the process whereby this settlement occurs. Generally, the scheme involves you paying a monthly amount to the agency you have hired and when the agreed upon amount been reached, they pay off your creditor. This typically means the credit ratings agencies, Equifax, Transunion, and Experion, will all have records of your non-payment of these monthly bills as your debt is being settled. As this process can go on for years (depending on your debt levels), and additionally, the debt settlement process is indicated on your credit report, how do you think it is going to affect your credit rating? Of course, it will be totally in the toilet... for up to 7 years after it has been settled.

Ultimately, debt settlement can affect your credit rating just as badly as if instead, you had declared bankruptcy. In fact, it's worse — you're still PAYING for the privilege. Not only that, but only unsecured debt is covered by the process — meaning for example your car and house can still be seized.

Know Who You're Dealing With

So how do you know the firm you are talking to is a true credit counsellor and not simply trying to sell you and your financial situation down the river? Ask them if they are not-for-profit. Are they trying to offer you real advice with budgeting and debt management, or is their advice to enter one of their programs to settle your debt for pennies on the dollar? Are they willing to spend real time with you on restructuring your finances, or are they trying to sell you on the idea of negotiating with your creditors to arrange a lesser payment?

If you suspect any of the above, and have any hope of maintaining your credit rating, take your financial issues elsewhere in search of true help. Don't get taken in by these parasites who simply make money from your financial misfortune and ultimately leave you worse off than before you entered the process.