Debt settlement, Debt Consolidation and credit score

Debt Settlement vs. Credit Counseling, Debt Consolidation effects on credit score:

A major concern for people considering debt settlement, debt reduction, or any form of debt negotiation is how it will affect credit score.

Here is some information on the effects of debt settlement on credit.

Although, for people with a high level of debt, with amounts of $20000, $30000, $50000, who are struggling to make their monthly payments, with delinquent accounts, credit score is already going downhill, they don’t really have any more credit since they already reached their top capacity for credit.

Any debt elimination option that involves paying less than the agreed upon terms will ultimately have some negative effects, most commonly reflected on an individual’s credit report. While both debt settlement and debt consolidation have negative effects, it is important to understand the differences in these effects and how they can affect you.

How Debt Consolidation effects on credit score:

According to the Fair Isaacs Corporation (FICO), your credit is no longer directly affected by being in a credit counseling program. This means that you will not see a change in your credit score simply for being enrolled in a credit counseling program. Nevertheless, you will see an impact which comes from a number of different reasons.

1. Creditors may chose to report your accounts delinquent for a certain period of time or for the entire length of the program. It is not uncommon for creditors to report the account delinquent until they have received the first 3 payments.
2. The credit counseling company keeps your first payment as a down payment for their services. This means that all your account will go at least 30 days delinquent.
3. Any payment program must be approved by the creditors. If the initial payments do not meet creditor criteria, the plan will be rejected, and a new plan must be submitted. If this process occurs several times, it could take up to a month to be approved, meaning that your accounts will go delinquent.
4. Your credit counseling company does not make payments. If the company is not reputable, it may simply not make the payments to creditors.

Any of these very common events will definitely result in a decrease in your credit score.

Additionally, most creditors will report the account as “managed by credit counseling service”. While this will not lower your score, the note will be seen by any lender and will make getting a loan very difficult. Most brokers treat this note equal to that of a Chapter 13 bankruptcy and will almost immediately be a cause for denial of the loan.

The biggest problem is the length of the credit counseling program, which typically lasts between 5-7 years. During this time, most companies will not allow you to request any type of credit, and even if you are allowed to, the probability of being rejected is extremely high.

Although a credit counseling program with not directly affect your credit score, there may be secondary results that do. Whether or not your actual credit score is affected, credit counseling will be noted on your credit report, making it difficult for you to obtain any forms of credit for the length of the program.

Debt Settlement effects on credit Score:

Compared to credit counseling, debt settlement tends to affect your credit more severely initially, but the repercussions last for a much short period of time. While there is no way to predict how negatively a debt settlement program may influence your credit. Once you begin a debt settlement program, creditors may report your accounts as delinquent. If you credit is less than perfect, then these marks will not have as great an effect as they would for someone with an excellent credit history. The initials months are when individuals may notice changes in their credit score, but eventually this levels out.

Just like in a credit counseling program, requesting credit during a debt settlement program is almost never permitted, and in the rare case that it were, you would almost certainly be denied. However, the advantage of a debt settlement program is that it only lasts about 36 months, or half the time of a credit counseling program. With the proper techniques, many people see a significant improvement in their credit score within 12-15 months of finishing the program. This means that in addition to saving you thousands of dollars in credit card balances, a debt settlement program will, on average, only affect you for about 4-4.5, while a credit counseling program will do so minimally for 5-7 years.

Debt Consolidation effects on credit score are different for different people, it really depends on the individual situation of every person.

In conclusion, while the initial effects of debt settlement may seems more negative, the long term effects of a credit counseling program will definitely restrict you much more.

For more information on how debt settlement, debt consolidation may affect your credit score feel free to call us and get a consultation with no cost, no obligation.