Impact of Debt Settlement on Credit Score

debt settlement

Debt settlement is undoubtedly a new concept in the Indian market. Ongoing pandemic has left many people confused and with their finances going out of their hands. Even after being a country with 139 crores residents, India has no consumer debt relief services. The lack of reforms for consumers suffering due to debt has also taken a toll on people’s mental health. To resolve this issue, our team has decided to take the first step toward helping people to live a debt-free life. Due to the newness of the concept, we get many questions from our clients, but the most commonly asked question is, “What would happen to my credit score?”

The answer is, “yes, your credit score would go down, if you settle your account.” But then there is more that goes on behind the scenes. Let us get into it and clear your doubts about it.

Why Debt Settlement?

Debt settlement is a financial management strategy that allows you to pay a lump sum amount of their total debt load. It has its advantages and disadvantages. If you are in significant debt and cannot afford to pay them off timely, debt settlement can be an option for you. Though debt settlement is not the last resort, one should weigh their options carefully. Only unsecured debts are eligible for settlement. That is not the only thing; you can only settle your debts if you have genuine hardship and you are delinquent on your accounts. 

How does enrolling in a debt settlement program impact your credit score?

Now, when you settle a debt, the delinquency status changes to “Settled” on your credit report. Having “Settled” written on your credit report dips your credit score.

But let us look at it in another way: 

If you face genuine hardship, you might have missed out on a few payments, which means your credit score must have taken the hit. Now, until you make the complete payment, your credit score will keep going down. But once you settle your account, each account paid would increase your credit score. In a nutshell, if your account(s) is/ are already delinquent, your credit score will not get a significant hit. There will be a dip of 45-65 points, which can cover soon once you start to make timely payment for your other account. Whereas if your credit score is good, there would be a dip of 120-150 points.

Another example is:

Let us say you have three unsecured loans and one secured loan; now, even when you are in a debt settlement program, making timely payments for your secured loan would increase your credit score. Your credit score will be affected, but it will recover. 

Here, one notable thing is that a settled account is better than not paying at all. Settled accounts remain on your credit report for some time, but good financial behavior can reduce the negative impact.

Now, the question is, how can you make your credit score better?

Technically, the answer is simple. You need to engage in good credit behavior, learn financial management, and pay off your debts in time. But if it is that easy, then why do people end up in a debt trap?

Here are some tips for you to improve your credit score:

  1. Make timely payments: This is one of the most impactful factors in your credit score. If your payment history is clean and fair, it indicates that you are a responsible borrower. It not only increases your credit score but also makes you eligible for future loans and credits.
  2. Kill the revolving debt: So, one of the easiest ways to reduce your debts is to stop the revolving debt. Many people fall into the debt trap because they keep putting one debt on the other card, which automatically increases their interest rate and debt. Try to stick to a budget so that you can pay off your credit card bills and loans in time.
  3. Keep a check on your credit score: Five factors can impact your credit score. First of all, you need to know how credit scores work and which factors affect them the most. Understand the reason for your low credit score, then work on your financial management skills to keep your finances in check.

Want to know how to improve your credit score? Read this