Though debt settlement can seem like an effective form of debt relief, in reality, it may do more harm than good. The good news is, there are other options out there. Read on to learn about debt settlement’s credit score impact and is other negative effects on your financial health.
What is Debt Settlement?
Debt settlement is when you settle on your debt for less than what you owe. Let’s say you have $15,000 in credit card debt. A debt settlement company might tell you that they have negotiated with your creditors, and you only have to pay $10,000. It’s a good deal, right? It looks like you’re saving $5,000! Unfortunately, that can be counted as income by the IRS, so you could be taxed on it.
Debt Settlement’s Credit Score Impact
One of the biggest drawbacks of this form of debt relief is debt settlement’s credit score impact. Because you are not paying the full amount of your debt, your credit score will take a hit. Additionally, when you enroll in a debt settlement program, the debt settlement company will not pay your creditors right away. They will wait several months and wait until you are delinquent on your payments before they start paying them. This is because creditors will not settle on your debt unless you are seriously delinquent or in default. Because payment history is the most important factor in determining your credit score, this will also cause your credit score to decrease.
All of these credit problems can make it difficult for you to get good interest rates later if you’re looking to buy a new car or a house. It may also impact your ability to rent an apartment, since many property management companies will check your credit before approving you to move into their building.
Other Debt Relief Options
The good news is, there are other forms of debt relief that will not be detrimental to your credit. A debt management program, for example, can help you get out of debt without negatively impacting your credit score. A debt management program is administered by a nonprofit credit counseling agency. In this program, your debts are consolidated into one monthly payment, and it is lower than you would be paying otherwise. This is because the credit counseling agency negotiates lower interest rates and fees with the creditors. You’re still going to pay off the full principal amount, just without the high interest and fees, so it won’t hurt your credit score.
If you are struggling to pay off debt, ACCC may be able to help. Sign up for a free credit counseling session with us today.