An Insiders Guide to Credit Scores and Debt Settlement

Having financial troubles can be hard to manage and overwhelming. With the rising cost of living, it's becoming increasingly difficult for people to keep up with their expenses and pay off outstanding debts. This can lead to mounting bills, overdue payments, and a poor credit score – all of which add up to an immense amount of stress and anxiety.

Whether you’re struggling with credit card debt or are in a crunch with student loan payments resuming, falling behind can significantly impact your overall financial health. But don't worry - there are ways that you can get back on track by understanding how credit scores work and exploring options such as debt settlement. In this article, we’ll discuss what goes into calculating a credit score, the benefits of settling debts in order to improve your financial situation, and how debt settlement affects your credit score.

What is a Credit Score?

A credit score is a three-digit number that reflects your borrowing and repayment history. A credit score ranges from 300 to 850, with 850 being the highest achievable score. The higher your credit scores are, the more likely you are to qualify for lower interest rates on loans and better terms on lines of credit.

Aside from granting access to certain financial products, having a high credit score can be beneficial in other ways as well. For instance, landlords may use your credit score when deciding whether or not to accept you as a tenant. In some cases, even employers may choose to run a credit check for job applicants.

When you open a line of credit, be it a loan or credit card, the payments are reported to the three major credit bureaus, TransUnion, Experian, and Equifax. When payments are missed on credit accounts, the missed payments are generally reported to each credit bureau, too. How you use the credit that is extended to you is a big part of what determines your credit score.

How to Get a Credit Report

Getting a copy of your credit report is the first step to understanding and improving your credit score. Under federal law, you're entitled to one free copy of your credit report from each of the three bureaus once every twelve months. The pandemic prompted the bureaus to temporarily lift this throttle, so access is generally less restricted, and you can presently receive a free credit report each week.

You can request these reports directly from the bureaus or alternatively use an online service such as Credit Karma or Credit Sesame. Once you’ve obtained your reports, be sure to review them for accuracy and look for any incorrect or outdated information. If there are any errors, contact the bureaus to dispute them.

When reviewing your credit report, you'll find a list of all current creditors and their balances. Your credit report will also contain the following:

• Your name, address, and recent employer(s)
• the type and age of each account
• the amount of available credit you have
• your payment history
• contact information for the lender
• collection information

While a free credit report contains an overview of your credit history, it does not show your credit scores. If you cannot get a free score directly from the credit bureau, you can get free credit scores from a platform like Credit Karma or Credit Sesame.

What Makes Up a Credit Score?

Your credit score determined by five key factors: payment history, amounts owed, length of credit history, new credit and types of credit used. There is more than one credit scoring model, but we'll focus our effort on the FICO score since it remains the most widely used of all scoring models.

Payment History

This accounts for 35% of your score and is the most important factor in determining your overall score. It's based on how well you manage your payments, including whether or not you make them on time, how quickly you pay off the debt and whether or not there are any past due payments.

Amounts Owed

This accounts for 30% of your credit score and is based on how much money you owe in relation to the total amount of credit that has been extended to you. In other words, it looks at your credit card balances compared to your available credit. The higher the ratio, the lower your credit score will be.

Length of Credit History

This accounts for 15% of your score and is based on how long each account has been open. Generally speaking, creditors prefer applicants with longer histories because they indicate stability and reliability.

New Credit

This accounts for 10% of your score and is based on how frequently you apply for new lines of credit. Too many inquiries in a short period of time can indicate to lenders that you’re desperate for money – making it a red flag in their eyes.

Credit Mix

This only accounts for 10% of your score, but it's still an important factor to consider when trying to improve your credit score. It looks at the different types of credit lines you have, such as personal loans (like car loans) or revolving credit (like credit cards). Having both can demonstrate that you’re able to handle different kinds of debt responsibly.

By understanding what goes into calculating a credit score, you can begin working on improving your financial standing and earn a good credit score.

Now that you understand how a FICO score are calculated, let's look at how debt settlement can help improve your credit score and overall financial health.

What is Debt Settlement?

Debt settlement is a process that involves negotiating with creditors to reduce the amount of debt you owe. It's important to note that it should only be used as a last resort, since it can have a negative effect on your credit score. Through negotiations, the goal is to pay off a portion of the debt in exchange for forgiving the rest of what is owed.

How much your creditors will accept can depend on the details of your situation, who the creditor and collector are, the state you reside in, and a multitude of other factors. Because of those nuances any debt settlement strategy should be intentional and well-considered.

How Settled Debts Appear on Credit Reports

After a successful negotiation, your settled account will typically be reported to the three major credit bureaus (Experian, Equifax, and TransUnion) as "settled in full" with a zero balance.

Keep in mind that "settled in full" is not as favorable as "paid in full" on your credit report, as it indicates that the debt was not paid off in its entirety. This is considered a derogatory mark and can have a negative impact on your credit score. However, having an account marked as "settled in full" is generally much better than an account that is delinquent or in collections with no action plan for resolution.

By settling your debts, you're demonstrating a commitment to resolving your financial obligations, which can be a positive step in the eyes of future lenders.

Credit Score and Debt Settlement FAQs

Let's take a look at some of the most frequently asked questions about credit scores and debt settlement.

How long does debt settlement appear on my credit history?

Debts that have been resolved through settlement will remain on your credit history for seven years from the date of the initial delinquency. This is true for all delinquencies on your credit reports, whether you settle the debt or pay it in full.

How soon can I expect my credit score to improve?

Your credit score typically takes during the debt settlement process, but there's no one-size-fits-all answer as to how long it will take to improve. Factors such as the amount of debt you owe, your existing credit profile, and how quickly you can accumulate funds for settlements all affect the timeline. It usually takes about 6-12 months of regular payments and reduction in debt before any visible improvement is seen in one's credit score.

Can a pay-per-delete remove the account from my credit reports?

The Fair Credit Reporting Act requires that information furnished- the companies that report to the credit bureaus- only report factual accuracies. So allowing a payment to delete the entire history is generally viewed as a violation of the FCRA. Pay per delete is not something that happens in today's collection landscape, but some collection agencies choose to stop reporting after an account has been settled or paid.

What is a good credit score?

While different credit scoring models have different credit score ranges, FICO scores range from 350 to 850. Credit scores that fall between 350-579 are considered poor, a credit score ranging from 580-659 is considered fair. A good FICO score falls between 670-739, and excellent credit scores are within the range of 740-850.

Is debt settlement reported to the three credit bureaus?

Debt settlement companies themselves do not report your enrollment in their program. Instead, your creditors and collectors are likely to report the debt as "settled" to the credit bureaus after an agreement is reached and the settled payment is made. Until that time, they will likely be reported to each credit bureau as delinquent.

Can I get a loan after debt settlement?

Many people can qualify for a home loan, car loan, or credit card shortly after or even during their debt settlement program. However, it will probably be more challenging and you may have a higher interest rate. When possible, it's smart to wait until you have a higher credit score and all negative accounts are resolved and removed from your report before applying for any new loans or lines of credit.

What is the difference between debt consolidation and debt settlement?

The main difference between debt consolidation and debt settlement is that the former involves taking out a new loan to pay off existing debts, while the latter refers to negotiating with creditors to reduce your debt balance.

Debt consolidation can help simplify your payments, but it typically doesn't offer significant savings on interest or principal. On the other hand, debt settlement usually results in significant savings because you are repaying a portion of what you owe, rather than the full balance plus interest.

Do I need a lawyer for debt settlement?

While your personal situation determines your risk, it can definitely help to have an attorney involved in the process. Some debt settlement companies have recommendations for prepaid legal services, while other people may prefer to work with a law firm directly. Generally speaking, the greater your debt, income and assets, the more beneficial it is to have an attorney in your corner. That said, many people negotiate settlements on their own or go through a debt settlement program without any attorney involvement, too. Take your time and explore options with several companies to make the right decision for you.

How do I find a legitimate debt settlement company?

IAPDA-certified debt settlement companies are an excellent starting point. The International Association of Professional Debt Arbitrators (IAPDA) is a professional organization that provides accreditation to professionally trained debt arbitrators. Certified companies have all gone through an intensive training program and adhere to the IAPDA's ethical standards. Find a legitimate debt settlement company by checking the cert' here on IAPDA.org, and look for this logo when researching a company.

Conclusion

Understanding and managing credit scores and debt settlement can seem daunting, but armed with the right knowledge, you can make it through to a debt free future. Entering in the right financial relief program for you, knowing what happens during debt settlement, and finding a debt settlement company you can trust are all crucial aspects of this journey. Remember, your credit score can improve over time with consistent effort and patience, but delinquent debt needs a plan of action.

When looking for a debt settlement company, consider those accredited by the International Association of Professional Debt Arbitrators (IAPDA) as they adhere to the highest professional and ethical standards. Use our search bar below to connect with an IAPDA-certified debt settlement company.