It is the question that is guaranteed to be asked by anyone considering debt settlement, "if I use debt settlement to reduce, consolidate or eliminate my current CC debt, how will it impact my credit score?" It is a great question, but let's first take a quick look at how credit scores are formulated, and then we can dissect the impact if you were to use debt settlement to improve your financial situation. Your credit score is a measurement of how likely you are to pay back a loan from a credit card company or financial institution. Your credit score can range between 300-850 and essentially represents your creditworthiness. Basically, you can look at your credit score as a way banks, landlords, and CC companies use to see how reliable you will be to pay back your debt in the long run.
You credit score is made of a few factors, so lets take a look at what makes up your credit score.
Payment history: Do you pay your debts on time?
Amount owed: This indicates how much debt you have in relation to your available credit.
Length of credit history: How long have your credit accounts been open?
Credit mix: This indicates the different types of credit your using.
Recent applications for credit: Applying for multiple credit cards can lower your score.
Now that you understand what your credit score is made up of, now we can try and understand the impact using debt settlement will have on your credit score. When my clients call me, they are usually in one of a few situations.
1. They are buried in a high amount of debt and are considering bankruptcy or debt settlement. For one reason or another, they do not care about their credit score as much (some are older, some already have a lower credit score, etc).
2. They are in a medium about of debt and are considering debt settlement, but are worried about the impact on their credit score.
When people call our company they want to know what the actual impact will be on their credit score if they decide to use Guardian Credit Solutions and Churchill Credit Solutions. My answer is consistent, as I want to set proper expectations with all of my clients. I cannot tell them the exact number or impact their credit score will see once they enter the debt settlement process. There are simply too many factors to consider. Understanding these factors, though, can help explain some possible scenarios.
Using the above factors that make up how your credit score is determined, let's also understand the debt settlement process. Clients determine who their creditors are, and typically will stop paying them for a few months. After a few months of not paying the creditors, typically the negotiations between our back office team and the creditors begins to take place behind the scenes. The first factor of why your credit score might dip during debt settlement is because usually the client is not paying their creditors (see reason 1 (the biggest impact on your credit score) for factors that make a credit score above - Payment history). The second factor as to why your credit score might dip during a the debt settlement process is based on the fact that if the process is working, creditors agree to except just a portion of the outstanding debt. That is what makes debt settlement so attractive to so many clients that are being hit with endless interest charges and cannot get out from under mounds of debt. When the creditor accepts our debt settlement offer, the creditor will eventually report our client's debt to the credit bureaus as "paid-settled". This simply means that the full amount was not paid, but there was a portion that was accepted and paid to the lender. "Paid-settled" is still better than the debt being written off, but it could impact your credit score negatively, as it is not "paid in full".
So what does this really mean for your actual credit score? Industry experts agree that the impact on credit score for someone going through debt settlement will depend on many factors including: how many creditors are involved in the debt settlement, how high the person's credit score is, how old the debt is, and what type of debt is being enrolled into the debt settlement. In the beginning of the process when a person is missing their payments to creditors, some experts have said that a credit score could drop as much as 80-150 points initially, but all agree that it will be different for each person based on their unique situation. There are debates from industry experts that the higher your credit score is, the bigger the drop you could experience. The Fair Isaac Corporation, the group behind the Fico score (the most common type of credit score) has done research in which a person with a 680 credit score (who already has one late payment on the credit card) would lose between 45 and 65 points after debt settlement for one credit card, while a person with a 780 credit score (with no other late payments) would lose between 140 and 160 points (source MyFICO. "FICO® Scores Versions." Accessed Feb. 22, 2021). Again, in your particular situation, does the temporary drop outweigh the opportunity to eliminate your debt?
For many clients of ours, it makes complete sense to sacrifice by having a small temporary dip in their credit in the short term to enable themselves the freedom to eliminate their debt. The good news for anyone who's chosen debt settlement as their way to improve their financial situation, you can and will be able to improve your credit score in the future. The difference is, you will be debt free, and able to build your credit score back with lower debt to credit ratios and on time payments.
The final question remains when should a person use a debt settlement company and when is best to view other options? Obviously that question needs to be answered by each person, but here a some factors that could help influence which path you choose. If you are caught in the endless cycle of CC account interest, where you make minimum payments every month but you balance never goes down, and you are struggling to keep up with life's other financial demands like car payments, mortgage, food, rent, etc etc, then you should consider contacting a debt settlement company. The temporary sacrifice of a minimal credit score drop will surely outweigh the benefits you will see as you first lower your monthly payments, and then eventually eliminate all of your unsecured CC debt.
For a free 15 minutes consultation, please call Guardian Credit Solutions (we are backed by Churchill Credit Solutions for our backend) @ 800-831-1946 or email us at jamie.b@churchillcreditsolutions.com. There is ZERO obligation, but you will learn how to improve your financial situation.