Individuals who are in a great deal of consumer debt sometimes believe that the only way out of their problem is a drastic solution like bankruptcy. Certainly, some people are so far in debt that bankruptcy is the only viable solution. A Statistics Canada survey illustrates the debt-to-disposable-income ratio of households increasing steadily from 1990 – 2018.
However, given that bankruptcy is the costliest debt solution in terms of its effect on your credit score, it is always wise to look into other debt relief options and their impact on your credit rating.
There is no such thing as a debt relief solution that is entirely free of consequences. Nevertheless, some debt solutions are less damaging on your credit than others. Credit counselling, for example, is on the other end of the spectrum from bankruptcy when it comes to its negative impact on your credit score. Debt settlement programs are also far less costly than bankruptcy or the consumer proposal.
The Basics of Debt Settlement
Debt settlement programs are designed to help you settle debts with your creditors for less than what you actually owe. It is best for those who owe more than $10,000 in consumer debt but have not yet reached the point where a consumer proposal or bankruptcy is the only viable solution. A professional can help you determine whether or not debt settlement is right for you. If you have some money saved already or will be able to save some over the next few months, debt settlement is particularly attractive because most creditors like to settle debts for a lump sum payment and you may be able to settle for pennies on the dollar of what you owe.
Debt Settlement’s Impact on Your Credit
The degree to which debt settlement will affect your credit depends almost entirely on the particulars of your situation. The more that your creditor writes off in settling your debt, the greater the negative impact on your credit score. Because of this, it is almost always wiser to get a professional debt settlement provider to negotiate on your behalf than to try and negotiate a debt settlement on your own. Your debt relief company will run the numbers and make sure that they are making the best possible offer for your credit score – one that will satisfy your creditors but not leave you high and dry financially.
If you are having trouble making your debt payments, then you have likely already experienced the negative impact that late fees and charges have on your financial situation and debt total. You should also know that late payments themselves make you less attractive to potential creditors the longer you are past due on your debt. Although a debt settlement will not clear your credit report of late payment notices right away, it may keep you from incurring any more late payments on the debt that is presently past due.
Lastly, your credit score will see improvement right away as debts are settled. Getting debts settled improves your debt-to-income ratio, which is one of the strongest influences to your credit score. So, if debt settlement is the right option for you, you should not put it off. The quicker you settle your debts, the sooner your credit score will improve. With an improved credit score, you will get better interest rates on new credit, find it easier to refinance major loans, and much more.
Rebuilding Credit After a Debt Settlement Program
When you finish paying off credit card debt through the program, it remains a part of your credit history for seven years. While debt settlement companies help you get out of debt, it can hurt your credit score. Depending on your prior score, your bad credit can be worse off.
However, it’s better for the creditors to receive compensation partially than not at all. Besides, you can rebuild your credit with proven techniques.
Ways to Rebuild Credit
Stick to a plan and the chosen tactics below to rebuild your credit:
- Develop a budget
- Pay all of your bills on or before their due date
- Keep credit usage below 30%
- Try using a secured credit card
A settlement plan affecting your credit score can be a small, temporary consequence when you consider the long run. Aside from the program itself, other financial services available include:
- Credit counselling
- Budgeting Forms and tactics
- Various calculators
Once you clear your credit card accounts and debts, you have the opportunity to establish a healthy score with the methods above.
Using a Debt Repayment Calculator
If you want to know how debt settlement affects credit, you can make some simple calculations. An easy way to decide on going with a settlement plan is by using a debt repayment calculator. Enter all of your debts and interest rates to determine:
- How long it will take to pay everything off in full (often years)
- The amount of interest you’ll pay over that time (potentially thousands of dollars)
- Your other payment options (the most cost-efficient, fastest route)
In the example above, it can take nearly six years to pay off your debt, plus over $9,000 in interest. After seeing the amount of interest and time you’ll have to invest, you may find a more suitable one.
Do I have to pay someone to help me settle my credit card debt?
No. You can do a debt settlement on your own. However, you may pay a small fee when enrolling with a credit counselling organization.
Will I be completely out of debt when I’m done with the program?
It depends. The following types of debt do not qualify for a settlement program:
- Student loans
- Back taxes
- Child Support/Alimony
In other words, secured debts cannot be part of your program.
How long does debt settlement affect credit scores?
Get the Help You Need
If you’re still thinking about debt settlement whether is right for you, sit down with a professional and review your debt relief options. Fill out the debt relief form and get started today.