How Debt Settlement Hurts Your Credit
According to Fair Isaac Corporation there are five credit score factors used in the evaluation of your application for a new credit or loan. Each factor has its own equivalent percentage. The largest portion of your FICO comprises the 35 percent of your payment history and 30 percent of the amount you owed. It is followed by the length of your credit history which is equivalent to 15 percent and the new credit accounts and the types of credit which share the remaining 20 percent of the FICO scores.
In the attempt to avoid filing bankruptcy most people turn to another option – debt settlement. However, the Federal Trade Commission has issued a warning regarding the danger of dealing with some debt settlement companies. Most of these companies only promise debt relief but in reality, they offer only debt settlement scams. And though it is often considered as a better option, you must remember that debt settlement hurts your credit in some other ways.
- Typical debt settlement companies claim that they can surely resolve your debt through a lump sum payment between 20 to 80 percent of your total balance. But this claim is not always true because according to the Federal Trade Commission, there is no guarantee that any credit company will accept partial payment of a legitimate debt. You should be wary to avoid this kind of debt settlement scams.
- Any settled debt from your creditor creates tax consequences. In effect, you have to pay the Internal Revenue Service.
- This process also takes a long time, approximately more than a year. It happens because the longer you do not pay, the better the settlement will be. Usually, creditors are reluctant to accept less payment unless they believe that you have the tendency to file bankruptcy.
- In reality, it is risky due to many debt settlement scams. Some companies are disreputable and the promises they make to settle your debt are misleading.
- Collections and lawsuits may still continue with debt settlement. You may still be sued while you or your representative attempts to settle the debt because your creditor has the right to sue you to recover the money you owe.
Although debt settlement is a better approach to reducing and eliminating your debt as fast as possible, you still have to think twice before making your decision. Remember that there are various credit score factors where good standing must be maintained. Once you undergo a certain program or plan, there is no more way to get out and the effect on your credit may become disadvantageous on your part.