Does Taking a Settlement on a Delinquent Bill Lower Your Credit Rating?

Debt settlement can help you finally pay down a debt you cannot afford, but the trade-off is you may do serious harm to your credit score. If you are already late on bills, however, this may be a small price to pay to get your finances under control. There are other alternatives to settlement that can get you back on track, such as counseling.

Identification

Taking a settlement on a delinquent bill damages your credit, but only those with very good scores see the most disastrous harm. A person with a score of 780, for example, should see a 105 to 125 point drop after their debt settlement, while a score of 680 has a 45 to 65 point drop, according to Bankrate.com.

Considerations

If you are already behind on your debt, your credit score is probably in a bad place. Most creditors won't consider a debt settlement until the debtor falls behind by more than six months. A 90-day late payment does 70 to 135 points of damage, so you likely do not have anything better than an average credit score at this point.

Benefits

As far as your credit score is concerned, it might be wiser to take the one-time hit of a debt settlement rather than years of missed payments. The credit rating agencies only note the debt settlement on your report for seven years. You can also become creditworthy several years before the settlement falls off your credit report. Even people with a bankruptcy sometimes return their score to the good-to-excellent range between two and four years after the filing.

Tip

Consider going to a trusted credit counselor, such as one approved by the U.S. Department of Justice, to help calculate a budget or possibly work with creditors on a new payment plan. Credit counseling does not affect your credit score and you might even be able to get credit while in the program. If you do accept debt settlement, realize it takes time to rebuild a score. Pay any existing account on time and continue to use credit---you must if you want to become creditworthy again. Secured cards are usually the only and easiest card to qualify for once you go through a major event like debt settlement. These are backed by a deposit, but usually become a normal credit card account with 12 to 24 months of consecutive on-time payments.