Will a Debt Settlement Program Lower My Credit Score?

Debt Settlement is a great way to pay off old, delinquent debts.  But, will it hurt or help your credit score?

Fresh_StartIf you find yourself with too much debt and not enough money to keep up with at least the minimum payments, a debt settlement program may just be what you need to get a fresh start!

But, I'm always asked, "Will debt settlement lower or raise my credit score?

Let's be honest....

The reason you are considering debt settlement is most likely due to the fact that you have accumulated so too much debt and your credit score had gone down already!

Maybe you...

  • Lost your job.
  • Are retired and living on tight, fixed income from Social Security and/or other retirement income.
  • Had a serious illness or possibly a career ending disability.
  • Went through a divorce.
  • The death of a spouse or partner.

How are Credit Scores determined?

There are basically 5 things that go into making up your credit score:

Payment history ...

  • This makes up about 35% of your credit score!
  • How have you been handling credit? 
  • Do you make payments on time?
  • Have you been late too often?
  • How long have you been using credit?

Balance-to-limit ratio...

This accounts for 30% of your credit score and in my opinion, actually carries more weight!

Add up all of your balances and the total credit limits you have.

Divide the total balance by the total limit.

Example:

You have about $25,000 of total credit card balances on 5 different cards.

Your total credit limit (each card is different) adds up to $35,000.

$25,000 divided by $35,000 = 71% !!!

When your ratio is above 30%, lenders think that you are over-extended and are not a very good risk to pay back a loan, etc.

This balance/limit ration is very, very important!

*Hint:

Many people make a serious mistake in trying to improve their credit scores by closing credit accounts or cards after paying them off.

Let's continue the example above and see what really happens:

Before:         $25,000 of $35,000 of available credit (credit limits) or 71% (too high!)

After paying off a couple of cards, the ration looks like this:

Total account balance         $ 10,000

Total credit limit                   $  35,000

Ratio:    $10,000 divided by $35,000 = 28% !!! (Looking good!)

Thinking that getting rid of a couple of cards will help his credit score, he calls and closes 2 accounts and his credit score goes back down!

Ratio:    $10,000 divided by only $25,000 (closed 2 accounts with $10,000 limit)

Now his ration is back up to 40%.  Yes, better than 71% before, but still over the 30% goal!

Length of Credit History...

This accounts for about 15% of your credit score.

Younger borrowers have not established a "credit use history" and fair or not, are punished in their credit score.

Lenders are looking for seasoned credit users who have proven they can handle credit.

It will take some time for this factor (only 15% weight) to improve.

In the meantime, don't run out and start opening up several credit cards thinking this will help!

This takes us to the next factor:

New Credit...

If you try opening several credit or store cards, it suggests to the lenders and the credit bureaus that you may be in financial trouble and are trying to "borrow your way out"!

Even though new credit accounts for only 10% of your credit score, it is still very important!

There are no "short cuts".  It takes time and a good payment history to improve your credit score.

Credit mix...

A good mix of revolving credit (credit cards) and installment loans (auto loan) looks better and is viewed as a good risk to lenders and the credit bureaus!

Although accounting for 10% of your score, this is still important!

OK, now you see there are several factors that go into making up your credit score.  So will a debt settlement program help or hurt your credit score?

There are no "quick fixes" so beware of ads that say they can remove negative items from your credit report, etc.) is to pay down and or settle balances.

If the only way to start improving your credit score is by paying down the balances, what if you just don't have that much income?

If your total minimum payments requires $500/month and you only have about $200 (if there are no emergencies, etc.), what are your options?

Debt Management (used to be called "credit counseling")

In this program, each of your creditors agrees to lower your interest and possibly waive some late or over-the-limit fees.

Your total monthly payment is usually about 2.4% of the total balances, which may be the same or even higher than the total of all of your payments now!

Let's say you have $25,000 of total credit.

At 2.4%, that's a payment of abut $600 a month!

If you are having trouble making the required total monthly minimum payments now, most likely a Debt Management Program will not help.

Debt Settlement

Once your accounts start going to collections and you start getting letters and calls (lots of calls!), it's time to face the hard facts!

STOP Collection Calls Free Sample Letter

You're in real trouble and if you don't do something quickly, creditors may start to file claims which leads to a summons, which can lead to judgments.

After a judgment is awarded, a creditor can apply for wage garnishment and/or a bank levy!

Serious stuff!

When a borrower is in serious trouble, they may be thinking about looking into BANKRUPTCY as their only solution.

Creditors will usually be willing to accept a settlement or reduced amount to avoid this.

Settlements can run from 40% to 70%, depending on several factors.

Recent Settlements See what we have  done for our clients!

The bottom line is that once a settlement is completed, even though your credit history shows late or no payments for awhile, now you have repaid or "settled-as-agree" the account and you have a $0 balance!

To potential lenders and the credit bureaus, this looks good and your credit scores will start to improve!

Bottom line...

Debt Settlement will help improve your credit score over time!

FREE  Debt Elimination Summary

 

 

Tags: your debt relief options, credit card debt help, your fico credit score, settlement

5 Things to Look for in an Oregon Debt Settlement Company

oregon deb settlement companyIf you are looking for a debt settlement company in Oregon or anywhere else in the country for that matter, there are 5 things to look for:

5 Things to Look for in an Oregon Debt Settlement Company

#1 Visit the Debt Settlement Companie's Website

Does the website offer in depth information, or is it just a landing page to capture your contact information?

A quality site will provide:

  • Detailed information about your choices when faced with debt
  • A blog that contains all kinds of vital information on a variety of topics
  • Free downloads to useful tools
  • Free consultation with a debt specialist

#2 Check their BBB Rating

What is the companies Better Business Bureau rating?  It is not essential that the company be "accredited" with the BBB.

In fact, the BBB is a private company that makes it's money from providing information about other companies for profit. To be "accredited", a company must pay an annual fee.

Focus on their BBB rating and complaint history!

# 3 Check to see if the company is registered with the state?

For example, any company that offers Debt Management, Debt Settlement or basically anything having to do with finance, must be registered with the Oregon Division of Finance.

There was an interesting article in the Oregonian today about an out-of-state debt settlement company that was fined for financially abusing elderly customers, so be careful and do your homework.

# 4  Go with Your Gut.

When you call the Debt Settlement Company do you feel like it is trying to help you or just trying to get you to sign up?  Having too much debt is very stressful and the last thing you need is to have someone try to give you a "one size fits all" approach to your problem.

A professional, quality debt settlement company will spend a lot of time discussing and counseling with you to determine what your best options are.

If you contact a debt settlement company and all they offer is debt settlement, HANG UP!

Your situation is unique and the answer could be one of several options including:

  • Debt Management
  • Debt Settlement
  • Bankruptcy
  • Credit Report Errors of Correction

# 5 Trust your Debt Solutions Specialist

You should feel like the person you are speaking with is knowledgeable, patient, thorough, and experienced.  If not, then trust your feelings and keep looking!

Tags: debt settlement in oregon, debt relief in Portland Oregon, your debt relief options, Oregon

Your DEBT RELIEF Options

your debt relief optionsSo you’re ready to get out of debt once and for all.  The question is, how do you do it and what options do you have.  I’m going to share the options available to you as well as the pros and cons of each. 

Debt Consolidation

Whe you enroll in a Debt Consolidation Program, you are hiring someone to help you get out of debt and coach you back to financial health.  They will work with you on a one on one basis and help you establish a budget and a plan to get out of debt.

PROS:

  • Lower interest rates on your credit cards. 
  • One REDUCED monthly payment
  • Stop harrassing creditor phone calls
  • Eliminate your debt in just 3-5 years!

CONS:

  • Pay back the full amount owed
  • No room for error - If you are late or miss a payment, the creditors will remove you from the program
  • Accounts will be closed by the creditor

Debt Settlement

When you enroll in a Debt Settlement program, you are hiring a team of Debt Negotiaion Specialist to work with your creditors and settle your debt for less than what you owe.  Debt Settlement is an excellent option for someone who has fallen behind on their monthly payments an is trying to avoid bankruptcy.  You can include unsecured debt such as Credit Cards, accounts in Collections, Repos, and Medical Bills in a Debt Settlement Program.

PROS:

  • You will eliminate your debt for much less than what you owe
  • You only have to make one small monthly payment
  • It will improve your credit over time much faster than going through bankruptcy

CONS:

  • May hurt your credit score
  • Creditors may continue to call you
  • Debt Settlement cannot help with secured debt such as a home or car loan

Bankruptcy

Bankruptcy is the process of declaring yourself unable to pay off your debts.  This does not mean it will get rid of all of your debt but most of it.  The typical bankruptcy for consumers is Chapter 13.  This is where lawyers will negotiate with your creditors and collection agencies to pay back less than what are owed.

PROS:

  • You pay less than what you owe.  The typical amount you will pay back on any certain debt will be anywhere from 30 to 80 cents on the dollar.
  • They work a payment plan out for you.  This will allow you to creditors back over period of time.

CONS:

  • Hurts your credit for the next 7 years from the point of discharge.  You will not be able to get a loan of any kind.
  • Costly.  Bankruptcy can cost a lot of money.  If you’re already in a lot of debt it may be tough for you to come up with the money to even go through this process.
  • Bankruptcy is also very time consuming.  Don’t expect the process to go very fast.  In most cases it will take several years to pay back all of your debts.

Would you like to learn more about what option is right for you?  Our Solutions Specialist can work with you to determine which option best fits your financial situation. 

For a FREE no obligation consultation,

give us a call TODAY!

1-877-492-4109

your debt relief options

photo by: Helga Weber

Tags: debt settlement, Bankruptcy, debt consolidation, create a budget, your debt relief options