Debt settlement can cause your credit score to drop by more than 100 points and stay on your credit report for seven years. If your creditors close accounts as part of the liquidation process, this can cause your credit utilization to increase, which also adversely affects your credit rating. In her new book, “Money 911”, financial expert Jean Chatzky answers common questions about money. In this excerpt, she writes about how to proceed with debt settlement and how it affects your credit rating.
Where is my money? Once you send it to the debt settlement company, it must be kept in an FDIC-insured bank account. The FDIC, or Federal Deposit Insurance Corporation, insures bank deposits, among other obligations. Many people are consolidated by applying for a home equity loan or home equity line of credit (HELOC), refinancing a mortgage, or applying for a personal loan. They then use this cheaper debt to pay off more expensive debts, most often credit card loans, but also car loans, private student loans or other debts.
You should also understand that when you consolidate a credit card debt into a mortgage debt, such as a home equity loan or a HELOC, you are taking an unsecured debt and converting it into a secured debt. If you stop paying an unsecured debt, you won't lose anything (except points on your credit score). When you stop paying a secured debt, the creditor keeps the asset that supports that debt. When you convert credit card debt into mortgage debt, you're securing that credit card debt with your home.
Personally, can you handle it? In about a third of credit card consolidations, in a short period of time, cards come out of the wallet again and, in a short time, are reloaded. Then you're in an even worse situation, because you have to worry about credit card debt and consolidation loan. You're in a hole that's twice as deep and twice as steep. Debt If you have any doubts that you will be able to avoid accumulating additional debts, do not.
You must be sure, and I mean absolutely sure, that you have the willpower to pay those credit cards and not use them again. If so, consolidating at a lower interest rate can help you pay off your debt faster. But if there's a small chance you'll get back into debt, it's not for you. A liquidated account remains on your credit report for seven years from the original delinquency date.
If you paid off the debt five years ago, there will almost certainly be some time left before the seven-year period is reached. Regardless of which method you choose, the most important factor in how debt consolidation affects your credit is how you treat the credit you have. Late payments on loans, credit cards, and other bills affect your credit score. A 30-day late payment stays on your credit report for seven years.
Only negative information disappears from your credit report after seven years. Open positive accounts will stay on your credit report indefinitely. Accounts closed up to date will remain on your credit report as per credit bureaus policy. Late and late payments can affect your credit score, so consolidating everything into a single monthly payment could help protect your credit from a payment setback.
You will also pay a fee to the debt settlement company, usually a percentage of the total debt you have or a percentage of the total amount forgiven. In some cases, such as when you apply for a mortgage, the lender will require you to pay or settle any outstanding debts before you can qualify for the loan. Balance transfers, in which credit card debt is transferred to a card with lower interest or no interest, work if you have a good to excellent credit score, i.e. 700 or higher.
Debt consolidation has the potential to help or hurt your credit score, depending on the method you use and the diligence you have with your payment plan. This includes things like late payments, debt collections, canceled accounts, and Chapter 13 bankruptcy. Debt consolidation involves applying for a loan to pay off others, often through a personal loan or balance transfer credit card. But for the settlement of debts, one company is enough or, as I said, you can often do the work on your own.
Although it is possible to do your own debt settlement and remove it from your credit report, it is a risky undertaking. If you have credit card debt that charges 20% or more interest, consolidating into a new credit card or loan with a lower interest rate will save you money. However, debt settlement will not improve your credit rating right away and, in fact, your credit rating is likely to decline. Even if you don't have to close your credit card accounts, avoid adding new debt to your cards as you work to pay your balance.
The most common are debt management plans, personal loans, and credit card balance transfers, but you can also consider a home equity loan or line of credit (HELOC) or apply for a 401 (k) loan. At that time, you will begin to hear from a debt collector, who now has the right to collect payment. . .