Credit score being affected by debt payoff plan?

When asked by lenders, “Do you have any current liabilities?”  , many borrowers are tempted to say ‘No’ or make unsubstantiated claims. Having debts could lessen your chances to possess credit at times however; it’s always wise to settle your debts timely. But many borrowers often think, “Will a debt settlement program affect my credit score?”  Let’s find out…

Impact on credit score

Settling your debt could have negative impact on your credit score. The impact depends on a number of determinants: your past and existing liabilities, the repayment history, whether or not your settled debts are presently in good standing, how much less than the original balance the debt was settled for, and many other factors.

Accounts settlement

Often settling many accounts at a time could hurt more than settling just one. While there isn’t always a hard and fast rule, generally your credit score drops less as you become more delinquent in your payments.

Negotiation with your creditor

It’s better to request your creditor ahead of time to have the account reported as paid in full, even when that is not the case. Your creditor is not compelled to do this, but it is not unheard of.

Consequences of non-settlement of your debt

In case, you do not settle debts then your score is not hurt right away. However, not settling might lead to continued late payments, default and credit collection attempts. These may end up hurting your score more in the long run. In such circumstances, debt settlement is a net positive on your score. The debt settlement remains on your credit report for seven years. If your settlement took place over seven years ago and is still showing on your report, contact the lender and the credit bureau to have the record changed and the settlement removed.

Conclusion

By nature, a debt settlement plan modifies or negates the original credit agreement. When the lender closes the account due to a modification to the original contract, other lenders are likely to take notice and be more wary about granting credit in the future.

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Source:  Secondary