This is a question we get all the time. And we’ll answer the question directly below. But first, I think it is important to point out that you may be asking the wrong question.
All too often, clients come into the office hung up on their credit score and how the various options in dealing with their debt will affect their score. But the reality is that your credit score is good for basically one thing – getting you more debt. Of course, there are a few exceptions, but for the most part, when people are worrying about their credit score they are really anticipating taking on new debt. And that probably shouldn’t be the highest priority when you are deep in debt already.
Debt Settlement Could Affect Your Credit Report Positively or Negatively.
Credit scores are not an exact science. They often differ wildly between the 3 major credit bureaus (Experian, Equifax & Transunion). And the credit report may not reflect recent activity or be riddled with errors. Having said that, the impact debt settlement may have on your credit score will largely depend on how the settlement is reported, or if it is reported at all.
Who Is Handling the Debt?
For any particular debt you have, you could have the original creditor reporting the account and any subsequent debt buyers or collectors it was assigned to. Some debt buyers don’t even report to the credit bureaus, some do.
Deleting the Trade Line
The trade line is the item being reported by the debt buyer. It used to be common to negotiate the deletion of the trade line when the debt was settled. That would essentially erase the item from your report, which is the best possible outcome and would typically positively impact your credit score.
However, because of the Fair Credit Reporting Act and other reasons, many debt buyers are not agreeing to delete the trade line any more or only in rare circumstances. If you can get it deleted, that would be best.
Settled in Full or Settled for Less than Agreed
Many times, creditors and debt buyers will simply update your credit file to reflect that the debt has been settled. This might be reported as “settled in full” or “settled for less than the full balance” or similar. In the short term, this could actually hurt your credit score because it will be considered a new negative entry. However, it also establishes that the account has been resolved, which is what many lenders are really looking for these days. So while this could hurt your score in the short term, it may lay the groundwork for you to recover in the long term. And if you get a lender that just wants to see it was resolved, it could help that effort.
Challenging Inaccurate Credit Reporting
All of the foregoing information is assuming that the item reported on your credit report is actually accurate. If it is not, you may have a variety of options. Certainly, you can dispute the item with the credit bureaus. If the creditor is not able to substantiate it, then it could get deleted. However, this process can be cumbersome and time consuming.
If you have a credit report issue with underlying debt, contact the firm for a free consultation.