Debt Consolidation

How Credit Debt Settlement Programs Affect Your FICO Score?

In order to know the effects of on your FICO score, you must first understand what exactly these programs are and how they work. When you sign up for a program like this, you can settle your entire debt with a creditor by paying a significantly reduced amount of money in one lump sum. Though you have an option to do the negotiations with your creditors on your own, it is not at all an easy task and your chances of success is very low unless you have exceptional negotiation skills and you know how to make a reasonable proposal. There are several agencies out there that provide settlement services for debts. As part of these services, the agency will negotiate with your creditors on your behalf and will try to convince them to accept a significantly much lower amount of money than the actual outstanding dues.

How These Programs Work?

When you sign up for a credit debt settlement program, the service provider asks you to make a certain amount of money upfront as their fee. You will be then asked to pay anywhere from 30% to 50% of the current outstanding balance to the company. If you cannot pay that much in one lump sum, you may be given an option to make the payment in several monthly installments. The company may give you 3-6 months of time for this. Once the company receives the money, they will contact your creditors and convince them to settle the entire debt by accepting the money they have collected from you. If your creditors agree, your debts will be closed forever. As you can see, you have to pay the company in advance before they pay to your creditors, it can be a very risky affair; unscrupulous companies may simply runaway with your money. So, you have to be very careful with your selection of the right service provider. You must do a thorough background check to make sure that the company you are signing up with is a genuine and reputable one.

Effects On FICO Score

During the time when you go through the credit debt settlement process, you pay to the company, not to your creditors. It is only after the company collects a reasonable amount of money when your creditors are paid. If you are making a one-time lump sum payment, there will be no negative impact on your FICO score because of this. But again, since you are not paying your creditors in full as you had agreed upon at the time of the commencement of the loans, it will definitely affect your credit. In your credit report, all those debts will be marked as “paid, but not as agreed”. This will result in a reduced FICO score.

Overall, credit can be very helpful in getting rid of the high amount of debts you are struggling with, but it is also very much likely to affect your FICO score adversely. Besides that, since you are supposed to make the payment in advance to the company, there is always a risk of losing your money if the company is an unscrupulous one. Therefore, if you must go for these programs, make sure you first do a thorough research and analysis.


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Posted in Credit Repair, Debt Consolidation, Debt Settlement | 3 Comments »

3 Responses to “How Credit Debt Settlement Programs Affect Your FICO Score?”

  1. medical assistant says:

    Valuable info. Lucky me I found your site by accident, I bookmarked it.

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