How Will a Debt Settlement Affect my Credit Rating?
Sunday, April 13th, 2008Before answering this questions, we need to understand what exactly a credit rating is and how it is determined.
Put simply, your credit report is determined by your history of borrowing and repaying. If you pay your bills on time, and manage your debt well (meaning you don’t live beyond your means, accruing more debt than a small per cent of your income), your credit score will remain healthy. Other things, including your profession, and stability or lack thereof, also affect your credit report. When you apply for new credit, or for another type of loan, the lender or creditor checks your credit report to determine your creditworthiness, or how likely you are to pay your debt back. If your credit is good, you generally benefit from more loan opportunities, and lower interest rates.
Unfortunately, taking part in the debt settlement process will damage your credit rating. There is no way to avoid this for the simple reason that you stop paying your creditors. However, if you are having a difficult time making payments on time, your credit may already be bad. Keep in mind that other debt solutions, including Consumer Credit Counseling, and Chapter 13 Bankruptcy, also negatively affect your credit, usually more so than debt settlement because they are more prolonged. This means that it is longer before you are out of debt and on your way to restoring your credit. Also, declaring bankruptcy leaves a permanent mark on your credit record; debt settlement does not.
Upon completing the debt settlement process, you can quickly begin making efforts to restore your credit. The easiest way to do this is to pay your bills on time and limit the number of credit cards you have, and the amount that you use them. There is no quick fix for your credit score, only time and financial discipline.
