Credit Impact of a Debt Settlement Program

No matter how you decide to handle your debt, it’s likely to have a significant impact on your credit. So what happens to your credit if you consolidate your debt with a debt settlement program? There are no guarantees, but here are some things to keep in mind.

Missing payments can hurt your score

If you're already behind on your accounts to the point where you're getting collection calls and letters, the damage to your credit has more or less already happened. If your credit is in good standing, however, pursuing a debt settlement will likely bring your score down by a lot.

That's because nearly all debt settlement programs require you to discontinue making payments to your creditors while funds are accrued for your eventual settlement offer. Payment history is the number one factor in nearly all major credit scoring models. This means that your credit score is likely to be hurt significantly by the months of missed payments required for most settlement programs.

Closing old accounts reduces the average age of your accounts

The older the age of your open credit accounts, the better. Debt settlement usually requires that your credit accounts become severely delinquent – at which point they are very likely to be closed. Those accounts closing could lower the overall age of your accounts and drop your score slightly, although the impact would likely be minimal compared to the damage done by the accounts becoming severely delinquent.

Once again this comes with the caveat that if your accounts are already severely delinquent or charged off, they're likely already closed and the settlement won't have any further negative impact in that regard.

Accounts may be listed as settled on your report

The primary benefit of debt settlement is that you won’t repay your creditors for the full amount owed. This sort of “less than full balance” repayment may be reported by the creditor, though that may not have much (if any) impact on your score.

Settled is better than unpaid

While having accounts listed as “paid settled” may be less positive than having accounts listed as “paid in full”, it’s still much better than having accounts listed as “unpaid.” If you can’t repay your debts under normal circumstances, it's usually better in the long run to take the credit hit of a settlement and then begin rebuilding your credit with a (mostly) clean slate.