Does It Hurt My Credit if I Make Deals With Creditors?

Making a deal with your creditors may damage your credit rating, but this probably is less harmful than keeping the status quo if you cannot meet your monthly debt payments. The only way to be sure that a deal with a creditor has no effect on your credit rating is pay the bill in full when due.

Identification

Whether a deal with a creditor can affect your credit rating depends on whether the deal results in you paying less than the monthly payment. A lender reporting anything less than "pays as agreed" results in a drop of 125 points or more on a FICO credit rating of 780, according to Ellen Cannon of Bankrate. Lower scores take less of a hit, because they have fewer points to lose. For example, a score of 680 loses between 45 to 65 after a debt settlement.

Considerations

You can make deals with a creditor that allow you to pay as agreed and avoid missed default. For instance, you can ask the creditor to defer payments, which means you do not pay anything on the loan for a certain amount of time, or forbearance, which only requires you to pay finance charges. If you go to a credit counselor, you can make one payment to the counselor under a debt management plan and have the counselor then pay your creditor. Lenders may report account in a debt management plan as "pays as agreed" even when the lender has to lower the interest rate.

Benefits

Any deal that avoids missed payments tends to improve your credit over the long run. A 90-day missed payment, for example, takes between 70 and 85 points off of a FICO credit rating of 680, according to Les Christie of CNN. You may also avoid the worst thing that can happen to your credit history: bankruptcy.

Tip

A settled account does the most damage when it is the only negative item on a credit report. Also, settled accounts often have a marginal effect on a credit rating, because lenders often only agree to a deal with a consumer defaults on his monthly payment. Thus, most of the damage occurs before the settlement. In any case, talk to your lender about options to avoid default and how they affect your credit rating. Also, consult a credit counselor, preferably one from a nonprofit organization like the National Foundation for Credit Counseling, about your options. For example, the counselor may help you rework your budget to limit unnecessary expenses and divert that money to debt payments.