Will Debt Negotiation Affect My Credit Negatively?

You may have seen or heard advertisements about credit card companies lowering the balance on credit cards that carry a high balance. If you think that this sounds too good to be true, you are, for the most part, right. Sometimes debt negotiation or debt settlement, meaning you pay less than what you owe, is your best option. However, it's important to understand the ramifications of doing so and to watch for for shady debt negotiation firms who may rip you off.

Credit Report Comments

Whenever you negotiate your debt with your lender for less than what you owe, your credit score suffers. According to Bankrate.com, your lender reports to the credit-reporting agencies that you "settled" your account, that the "debt settled for less than the full amount due," or the report reads, "partial payment accepted." The account will show that you don't owe any money, but the negative terms will be on your report in the comments section.

Loss For the Lender

Comments on your credit report associated with debt negotiation are as bad as having a charge off (where you don't pay your balance at all), a bankruptcy or a repossession, according to Bankrate.com. All of these actions ultimately result in a loss for the lender. If a lender loses money doing business with you, that sets off a red flag for future lenders.

Credit Score Suffers

Your credit score suffers from the debt negotiation process. Lenders typically do not negotiate your debt simply because you have a large balance. If you are making regular payments, there is no incentive for the lender to negotiate your debt down. If you start missing payments, the lender may be willing to negotiate. Missing payments, however, comes with consequences and lowers your credit score more than any other action. Payment history makes up 35 percent of your credit score.

Debt Negotiation Companies

If you are thinking about debt negotiation, beware of debt negotiation companies that advertise to negotiate on your behalf. Do not believe any firm that tells you that it can remove negative comments from your credit report, warns the Federal Trade Commission. You cannot remove negative entries on your credit report that are accurate. You can ask the credit reporting agency to correct errors, but not to remove a truthful event. Creditors have a legal obligation to provide accurate information to the credit reporting agencies, according to the FTC.

Warning

If you are successful in negotiating your credit card debt for less than what you owe, the Internal Revenue Service will consider any amount of money you save to be taxable income. If you are not successful in negotiating your debt, your credit card issuer could sue you for the balance.