How much does debt settlement affect your credit score?
When I first came across the idea of debt settlement, it sounded like an easy way out. In simple terms, debt settlement means paying less than the actual outstanding amount.
You may think it is just about to pay a part of what you owed and close the chapter. However, the truth is that a settlement can leave lasting damage on your credit score.
Lenders immediately read it as a sign that you cannot repay the dues in full and lowers your credibility for new credits. Instead of marking the account as ‘closed’, your lender will mark it as ‘settled’. It signals to future lenders that you have trouble managing credit responsibly.
Nowadays, lenders not only seek a high credit score but often ask for no settlement in your credit history. In summary, these are some of the main consequences you may face:
- It can slash your credit score by 75 - 150 points in one go.
- The ‘settled’ status stays on the credit report for up to 7 years.
- Lenders can either decline your loan applications or offer loans at a high interest rate.
In such cases, you can try other methods such as restructuring or debt consolidation loans. Even paying the full amount late is far better for your profile than settling for less.
You may think of debt settlement as a shortcut to repay the dues. But it weakens long-term financial health. I never recommend this option even in my own case.