Can You Repair Credit With Debt Settlement?

Can you repair credit with debt settlement?

The short answer to this question is NO! And I say this because debt settlement should never be considered solely as a means of improving or repairing your credit.

The long answer is this. In the short term, debt settlement will have a very large negative effect on your credit score (assuming that your credit is not already extremely poor). While in the long term, the effect on your credit will depend on a number of things which I'll discuss below.

The Short Term Impact Of Debt Settlement On Your Credit Score

One of the things that has the most impact on your credit score is whether or not you pay your bills and make your debt payments on time. If you want your credit score to take a quick nosedive (not that anyone would) simply stop making payments on your bills/debts for a few months. Your FICO score will fall like a rock.

Why is this pertinent? Well, in case you are unaware, the first thing that you do when beginning a debt settlement program (whether through a settlement company or on your own), is to stop paying your unsecured creditors. And once you take this step, your credit score will suffer quickly as your creditors begin to report that you are not making your payments.

Can Repair Credit With Debt Settlement Over The Long Term?

What will be the effect of debt settlement on your credit in the long term? That is a little more difficult to answer, especially since it largely depends on what your credit looks like before you begin the process of settling your debts. Having said that, here are a few things to consider.

Paying off your debts will not instantly cure your credit problems. Many folks mistakenly believe that if they could just pay off all of their debts, their credit score would instantly skyrocket. Unfortunately, this is not true. Your credit score is based on your credit history and takes into account many things. Paying off your debts will surely help improve your credit score over time, but it will not improve your credit instantly

Debts paid off by means of a settlement will most likely show up on your credit report as "settled". And this can be a red flag for future creditors. It tells them that although you no longer owe that debt, you did not pay it back in full.

If you think you can quickly repair credit with debt settlement, you are mistaken. Even when successful, the debt settlement process can take up to 36 months (any longer and your chances of a successful settlement would be doubtful). This means that you are going to be delinquent when it comes to paying one or more of your accounts for up to three years, during which time your credit will get worse before it gets better.

Debt settlement is "typically" only advisable as a debt elimination plan if you are already considering bankruptcy In fact, debt settlement is often referred to as the "new-bankruptcy" because it is an alternative to having to declare chapter 13 bankruptcy. So unless you are faced with a potential bankruptcy, look for other options as they will do much more to repair your credit in the long run.

Debt settlement is not for people with good credit and the ability to make the payments on their debts who simply don't want to pay their debts in full. If you have good credit, negotiating settlements on your debts will surely ruin that good credit quickly and for years to come.

If you already have very poor credit, then settling your debts will likely not affect your credit in the short term and may even improve it in the long term. Don't get me wrong, there are other "better" ways to repair your credit than debt settlement, but if your credit is already extremely poor (likely because you have stopped paying many of your creditors already, then beginning the process of negotiating settlements will likely not hurt your credit any further.

Rather than trying to repair credit with debt settlement, you would be much better off paying down your debts over time. Paying off your debts slowly over time will almost always be a better option than trying to repair credit with debt settlement. Making your debt payments in full and on time every month while slowly paying down those debts is by far the best way to improve and repair your credit over time.

Final Thoughts...

The bottom line here is that regardless of whether or not you can repair credit with debt settlement, this should not be the deciding factor when it comes to choosing this option for debt relief. For a complete introduction to debt settlement see my article here.