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Why Do Settled Debts Have an Adverse Effect on Credit

By: Michael Millington

The idea of settling your debts for less is an appealing proposition, especially so if you aren’t able to keep up with regular payments. In many cases the wait to pay a bill (in full or at a fraction of the price) is too much to overcome on your budget. This would make for a tight or undoable squeeze. This is also where s settlement could help you out. Settlements allow you to pay less than what you owe in order to consider yourself out of the obligation woods. But if you do settle a debt, there may be an adverse effect on your credit.

The reason your credit would be negatively impacted is because regardless of whether you’ve paid the debt off, you wouldn’t have paid off the entire debt. This shows up as a red flag to other creditors you might want to borrow from in the future. The decrease in credit is only marginal when considering missed payments and the like. In other words, if your credit has already been decimated by other negative marks, a settlement wouldn’t produce that much of a drop in your score.

Is There a Way to Settle Debt Without Lowering Credit Scores

The main issue with credit and settling debt is the timing. After having made no payments for some time (over three to four months in some instances) your credit will go down. With certain actions that negatively impacts your credit record, the level of impact that these actions have will diminish. The lower your credit score, the less something like this will affect you. This is why many people have no problem settling debts after missing multiple payments and suffering with debilitated credit scores. Just be certain to research a debt relief option before hand.