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Licenses and Disclosures. Advertiser Disclosure. By Jennifer White. Dear Experian, Will it affect my credit scores if I settle a debt for less than the original amount?
Dear JYS, Yes, settling a debt instead of paying the full amount can affect your credit scores. Settling an Account Is Better Than Not Paying at All Although settling an account is considered negative, it won't hurt you as much as not paying at all. How to Begin Improving Your Credit Score If you've had financial troubles in the past, but now you're working to improve your credit , you're on the right track.
More tips for building and maintaining good credit scores include: Make all payments on time going forward. Your payment history—whether you make all payments on time—is the most important factor in credit scores.
If you are ever in a situation where you may not be able to make a payment on time, you should contact your lender to discuss your options before the account becomes delinquent. Reduce balances on revolving accounts. The second most important factor in credit scores is your utilization rate —the amount of credit you're using relative to your overall credit limit. If you tend to carry high balances on your credit cards, reducing that debt load will improve your utilization rate.
Once you enroll, you'll immediately see an impact. Focus on your risk factors. If you haven't already, request your credit score from Experian and pay close attention to the risk factors provided with your score. These factors tell you what you need to do to improve your credit scores. Review your credit. Your personal credit report includes appropriate contact information including a website address, toll-free telephone number and mailing address.
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A number of legitimate debt settlement companies operate in the U. Most states require that they be licensed. Debt settlement companies are supposed to follow industry regulations that are designed to protect consumers and their money. Be cautious. If a debt settlement company promises certain results, proceed carefully. Ask about costs. Review your finances. Debt settlement companies frequently require you to put money into a special savings account for 24 months or longer before the debt is completely settled.
These payments go toward the lump-sum settlement of your debt. In some cases, you may find it hard to keep up with these payments. Therefore, you might give up on the settlement agreement before all or some of your debt is cleared.
Inquire about the timetable. It often takes two to four years to complete the debt settlement process. Over that time, you may accumulate interest and fees charged by the creditor, in addition to the fees charged by the debt settlement company. Why might you be hit with interest and fees by a creditor? Select a debt settlement company. Nail down the details. Know the tax consequences. Debt settlement may be good or bad, depending on your situation.
Here are some potential risks associated with debt settlement. The hard truth is that the creditor may reject the settlement offer. Therefore, you and the debt settlement company may need to submit a counteroffer. You might also be forced to reach out to the original creditor to see whether you can work out a payment plan. In the worst-case scenario, you may owe more than you did initially, and a rejected settlement offer may push you toward bankruptcy.
Fees paid to a debt settlement company or fees and interest charged by an original creditor could add hundreds or even thousands of dollars to your debt.
A debt settlement will cause your credit score to drop—perhaps by more than points—and the damage could last for a while: A debt settlement remains on your credit report for at least seven years. Here are four alternatives to debt settlement. Visiting with a counselor at a nonprofit credit counseling agency can help you get back on your financial feet.
Among other things, a credit counselor can help you create a budget, make recommendations about debt consolidation, advise you about closing at least some of your credit card accounts or counsel you regarding bankruptcy. One of the tools at the disposal of a nonprofit credit counselor is a debt management plan , or debt management program DMP.
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