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Will settling a credit card debt hurt your credit?

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2014-06-20 18:23:36
2014-06-20 18:23:36

The first step that most U.S. banks require to begin the settlement negotiation process is that the customer must be delinquent in his or her monthly payments. So, initially, yes is the answer, as missing monthly payments will reduce your credit score. The longer the payments are missed, the more the score will drop.

However, once you reach a negotiated settlement, the bank will report to the credit bureaus that the account is "paid, settled for less than amount owed." While this doesn't rate your score as high as an "account paid in full" note, you will actually see a rebound in your credit score as accounts are settled because a settled account, even if for less than the total originally owed, is better than an outstanding or delinquent account.

Lastly, if you are considering debt settlement as an option, a better question to ask isn't simply, "Will is lower my credit score," but rather, "Is it worth lowering my credit score to settle the account." If you have a significant amount of debt and know you can save 'thousands' or 'tens of thousands' of dollars through a settlement, it may be worth the extra few points in interest you might pay on a new loan to settle your delinquent debt.

You want the item on the credit report to state, Paid. Do not accept anything less.

Actually, it would be better if you could get them to delete the item when you pay it off. Send them a 'pay for delete' letter via certified mail. If they agree, make sure you have it in writing. I also suggest you offer less than is owed, 35 - 50% of total debt.

Know that your credit scores are marked according to the age of the history. If you are wanting to fix your credit score for a possible loan, do not pay on anything over two years inactive. Doing this will bring the account current and negatively affect your credit score more. If you are looking for long term credit repair (not a loan soon) than pay the charged off account off. There are three main credit bureaus -- Transunion, Experian, and Equifax -- and that they give you a grade on your credit-worthiness according to what your creditors report to them. While each of these three bureaus may have some small variables that differentiate their scoring, the FICO scoring model is still the heart. FICO stands for Fair, Isaac and Company, the group that designed the model. Here is how they say the score breaks down:

  • 35% - payment history
  • 30% - amounts owed
  • 15% - length of credit history
  • 10% - types of credit
  • 10% - new credit

Getting a credit report is quite simple, but getting your credit score can be much trickier. Make sure any company you pay to send you your credit report is also sending you the credit score, so you know the exact number that lenders are receiving. (Most companies will charge extra to show you the scores.) Credit.com is one place that will send you a credit report and your credit score for free -- but you have to remember to cancel your membership within their 30-day period, and you only receive one of the three bureau's reports. Credit Resource Corp. refers their clients to an Annual Credit Watch Program that will give you 24/7 access to your updated credit reports and credit scores from all three bureaus without causing a HARD INQUIRY. Most delinquencies aren't reported to the credit bureaus until after they are 30 days late. This allows for a small grace period - which is supremely helpful to folks who aren't adept at organization. What's valuable to know is that delinquencies which occurred within the past 2 years are of greater weight than older items. That means that if you see an item sent to collections, it might actually hurt you to pay it off during the loan process if it's more than two years old. Why? Because paying collections will decrease the credit score due to the date of last activity becoming recent. But if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first. If, however, you have any recent accounts with past-due amounts, paying them off immediately will help your credit score. Again, if you do decide to pay off a collection, MAKE SURE that the creditor gives you a letter of deletion first.

Here are more opinions and answers:

  • Yes, it could. Although credit card companies may encourage you to settle your debt with the help of a credit counseling service or a debt repayment plan, as an alternative to bankruptcy (where they may get nothing), this step would still become part of your credit history. According to the FTC, "the use of debt counseling may appear on your credit report. Some creditors consider this activity negatively; some may consider it as a positive step."
  • In addition to the above, Creditors will sometimes offer you a straight settlement through their collections department (I know, I used to be a collector) and I strongly advise you to NOT TAKE IT. Although it may sound nice to give them a one time payment and be done with it, the debt will show on your credit report as SETTLED. Other lenders will look at that and not be as willing to lend you money down the line (or an apartment, job in finance, etc.) for fear that you will not be willing to repay the full amount you owe them. Credit Management however is only a temporary mark on your credit. As soon as you are done with the program, the mark falls off. Most Credit Management companies will have you sign an agreement that you will not open any more lines of credit or loans while on their program anyway though, so it isn't that big of a deal. No one will be looking at you.
  • Relax. Two years from now (2009) greater than 40% of the population will have poor credit scores based on todays credit rating system. This means that the banks will be forced to lower their credit rating standards if they want to obtain new business (lending). Considering that it is the banks who first created the profitable cycle (for them) of organized periods of boom then bust at the expense of Joe citizen, it would be a moral hazard for you to pay them anything. The banks have avoided any recent possible losses by raping the U.S. treasury, your money, and now they want you to continue paying them. This is double dipping. Go ahead and forsake your credit score today because the system will change and in two years you will be allowed credit again.
  • Yes, almost anything will for a short time. Your score moves up and down like a

    merry go round. But if you follow the advice above it will bounce back quickly.

    EX- I charged 10.000 in June on a card but paid it in full ex for 5.00 in July, my score went from 748 in June to 720 in July and the to 740 in august.

  • Find financial consultation for free, there are many financial institutions that provides consultation for free. Try visiting totaldebtservices.com
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it would really depend on the age of the debt, if it is more than 6 months, leave it alone. By settling it it becomes current news not old and forgotten. It will make you feel better about paying your debts but will actually harm your credit score. You'll sleep better at night but your credit won't.

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It can, just because there are a lot of credit lines open, and so your potential debt is higher. If you really aren't using a credit card, it is better to cancel it. However, in terms of things that hurt your credit rating, having an inactive card is relatively low.

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AnswerPaying of your debt in collection will hurt your credit score as it will show that your payment is not of the required amount and not in time.

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Will canceling credit card effect credit

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Getting debt counseling is a good thing and shows your willingness to take care of your debt in a responsible way. If you are undergoing debt counseling, a notation to that effect may be appear on your credit report. This does not affect your credit score but how each creditor views this notation, differs from creditor to creditor. While it may seem unfair, there are some creditors who view debt counseling as a negative to your credit worthiness. In their view, the fact that you are in an unmanageable debt situation is not a good sign, unless you can convince them otherwise. So the reality is debt counseling may hurt your credit, depending on the subjectivity of the creditor.AnswerDebt counseling will never hurt your credit, since it is an educational activity. If you choose to enroll in a debt management program, that does not hurt your credit either. What could hurt your credit is closing any accounts that have substantial available credit. Other than that, your credit generally improves over the life of the debt management program.

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Yes, they will note on your report that this debt was "settled" This does not affect credit score but will catch the eye of any lenders looking at your report.

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Yes, debt consolidations can be a negative factor on your credit reports. Though it is probably worth it to consolidate your debt rather than go deeper into debt, which will hurt your credit even more.

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A credit card can help your credit score improve if you pay it on time. Over time it will show you have a good payment history and it can also diversify your credit if you have other types of credit accounts. Keeping a low balance will also help your debt to limit ratio. It will only hurt your credit if you max it out and don't pay it on time.

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It will depend on the way you use your credit card. Having and using a credit card wisely can be beneficial to your credit rating. Financial experts recommend keeping your account balances less than 50% of your available credit. It shows that you have the ability to pay back your debt. However, if you're constantly applying for new credit cards, it can hurt your rating.

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If you manage your debts well, that will be good for your credit. If you manage them badly, then yes, your credit will suffer.

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If you already have too much debt, then yes. If you do get a card, make sure that your balance never goes over 35% of the high credit balance or this will reflect poorly on your scores. Also remember, when you go requesting your credit to be pulled for a new credit card, this will bring your scores down somewhat as well.

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Yes. They will also consider how much debt your currently have and how you are paying your other current obligations as well. Just having a past paid collection will not hurt your chances in getting a credit card.

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Yes. Eliminating a card will hurt your credit, not help it. If you have to get rid of a card, cut it up and stop using it, but don't cancel it.

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It depends on your contract and the terms of the payoff.

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It will not affect your credit if you pay off the balance when you close the account.

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Well, I would imagin that ANY positive action would be favorable yo NO action. A settelment my not look as good as 'Paid in Full", but "Paid as agreed" sure beats an open collection account.

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Maintaining good credit is a really important way to help lower your monthly bills, especially if you have credit card debt. Credit card debt can help or hurt your credit report, which in turn can reflect your interest rates. Obviously, you need to be making at least your minimum payments on time. The second important thing is to not max out all of your credit cards. You should only use your credit cards when it is an emergency. The best ways to manage credit card debt and to maintain a good credit score is to pay off your debt off entirely, and on time. However the most important thing to do is to always pay your credit card bills on time. Paying credit card bills late will not only increase your bill amount, but can negatively affect your credit score. Keep track of your monthly expenses and your income each month. Make sure you have enough money to pay all of your monthly bills before you spend money on extra expenses.

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No. It will show on a credit report as an account closed due to inactivity. It has no effect on your credit score.


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