Debt settlement and how it affects credit score
Q: My credit scores were around 780, but that was before I had two 30 day late payments in 5 months on the credit card with Chase which I am currently settling. I had to take a much lower paying position and don't have other options but to settle. The debt settlement deal is quite good, Chase accepted $3,500 for $12,800 balance. Wells Fargo and Capital One will be next. My main concern is how debt settlement affects credit score? Where would the scores be and how long it would take for them to recover?
A: Before we dive into debt settlement, the obvious point is that two 30 day late payments already lowered the credit scores by probably 170 points, so your score is at 610 to 620 range. With these late payments alone, it would take over 2 years for credit scores to recover may be 50 points or so, because you were late twice on the same credit card, as was mentioned in 30 day and 60 day late payments.
Once you reach debt settlement with Chase and it gets recorded on your credit report as such, and affects the credit score further, dropping it by another 25 to 40 points. The reason is obvious - settling a credit card debt means that the lender agrees to accept less than the amount owed on the account, thus indicating a higher level of risk. Since your credit score had already lost quite a few points, the debt settlement impact would be less severe. Remember, the higher the scores, the lower they fall when derogatory information is reported.
You did set up a very straightforward debt elimination plan and have to stick to it. When you are done settling with Chase, debt settlement deals with Wells Fargo and Capital One will likely take another 40 to 50 points of the credit score. See What affects credit score according to FICO.
Thus by the time you finish, 3 debt settlements combined with 2 late payments will affect your credit score by around 250 points, and you will be looking at 530. And it may take up to 3 years of impeccable credit history to recover the scores to the mid 600s level.
The important thing is that most of the damage to scores was done by the missed payments. At this point, the impact of debt settlement on your credit score is rather secondary. You managed to settle for 27% with Chase and getting similar or even lower percentages with Wells Fargo and Capital One should take precedent over any other concerns.
The other crucial element is that by settling debt before it is assigned to a collection agency, you can eliminate potential future problems,
- having two negative records reported on the same debt - one with original creditor, the second with collection agency
- dealing with debt reaging issue, practised by many collection agencies
- seeing you credit score dropping very significantly after debt settlement with collection agency should you achieve it
Of course, before paying off the negotiated settlement amount, you can try to convenience creditors to stop reporting previous late payments and report account status as Paid As Agreed / Closed by Consumer Request. You can also get debt collection agency to drop the collection from the credit report. Those would affect your credit score very positively, boosting it at no time. Read
Negotiate credit card debt yourself for useful tips.
The bottom line is while typical debt settlement affects credit score negatively, in addition to preceding late payments, you can always try to minimize the damage. The most important task is to liquidate excessive debt. You can establish credit anew after you settle.
Sun Jul 31, 2011 03:07PM | Copyright: www.bad-credit-advisor.com | More in Credit Score Help | Comments (0)
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