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How Does Debt Settlement Affect Your Credit? 4 Things To Know

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In this article, we will explain how debt settlement may negatively impact your credit score and provide credit score simulations how your credit score may be impacted (below). For example, many individuals are concerned about whether they will be able to rent an apartment while in a debt settlement program or how to survive.

And while debt management (also known as nonprofit credit counseling) may help preserve your credit, the cost may be much higher than a debt settlement plan, providing less debt relief. As such, we built a free debt relief calculator below that will help you estimate the costs and pros and cons and credit score impacts of various options to help you make the most informed decision:
So, how would your credit score be impacted? Let’s begin.

Introduction

Debt settlement (or debt relief) can be a great way to achieve debt freedom when debt becomes unmanageable or when an unexpected financial hardship occurs. Most people that enroll in a debt settlement program realize that they need some sort of debt relief, so they understand that their credit score will be impacted negatively, but the extent of that is unclear.
If you are looking at pros and cons and RED FLAGS to look out for, check out our video below. We used to be a debt settlement company, so we produce a lot of unbiased content on our Debt Settlement YouTube Playlist. I hope it’s helpful.
 
Debt settlement is not for those who are looking for a quick out to their debt, but as an avenue for those who would like to avoid bankruptcy and know that the credit score will be negatively affected regardless. Debt settlement might be or might not be a good option for someone with an 800+ FICO score as well as a 570 FICO score, but it really depends on each individual situation.
 
In this article, we will present specific examples of how debt settlement may affect your credit score and give insight into how you and Ascend can mitigate these negative effects.   We also recommend reading debt settlement pros and cons and how to determine whether a debt relief company is legitimate before signing the dotted line. in this area

How does your Credit Score work?

I won’t go into too much detail, as the goal of this article is to get into the specifics of how debt settlement affects your credit score. I do want to provide a quick overview of how Credit Score works. Fair Isaac and Company (FICO) does not provide the exact details of how the score is calculated, but they do provide the weights of the criteria as follows:
 
Debt Settlement Credit Score Impact - How Credit Score Calculated
 
Many folks ask us, “How will debt settlement impact MY credit score?” We can get into some scenarios later, but this is a challenging question because the impact is made up of the following factors:
 
  • The current condition of your credit: If all your accounts are currently in good standing, the debt settlement will have more of a negative impact vs. already being behind on all your payments.
  • Reporting practices of your creditors: Some creditors do not report, some report only to one bureau, etc. This will affect how your credit score is impacted.
  • Size of the debts being settled: Larger balances tend to have a larger impact on your credit score. If you settle on smaller accounts and are current on larger accounts, the score effect may be less adverse.
  • Credit Report Account Status: On your credit report, there can be a notation of “Paid-Settled.” This is generally better for your report than “Charge-Off,” but it obviously does not look as good as “Paid In Full.”
 

A Simulation of How Debt Settlement Impacts Your Credit Score: 

We would love to run a simulation for your specific situation, but in this article, we will observe three hypothetical scenarios using the FICO simulator found from the consumer division of FICO where the entrant in the debt settlement program has good credit, fair credit and poor credit as defined by Experian. We hope this gives you the most accurate projection of the dip level. As stated above, each score is different, so this is a simulation and actual results may vary. Please also note that these are ranges, so it’s possible to dip from the highest range to the lowest range.
 
Debt Settlement Credit Score Impact Questions Considered
 

Good Credit (670-739) – Credit Impact Range

Debt Settlement Credit Score Impact Good Credit

Fair Credit (580-669) – Credit Impact Range

Debt Settlement Credit Score Impact Fair Credit

Poor Credit (<580) – Credit Impact Range

Debt Settlement Credit Score Impact Poor Credit
 

How does a reputable debt settlement company help mitigate this negative effect?

Some debt settlement companies are not legitimate, often pitching only the pros of debt settlement and not necessarily the cons of debt settlement. You may want to check out this article, “Are Debt Relief Companies Legitimate?” to help you decipher who to work with.
 
Why does this have anything to do with credit score? The reason is that a good debt settlement company will help make sure that you are helped throughout the process instead of just trying to sign you up and then leaving you to get the next sale. Ascend has only found a small handful of debt settlement companies who we would be comfortable referring to folks.
 
So, what does a good debt settlement do to help mitigate the negative effects of credit score?
 
  • Credit Report review: Throughout the program, your personal advisor will review your credit report for you. All our advisors are well-versed in credit reports, how to find potential inaccuracies, and discovering other areas that are being negatively affected.
  • Credit Report estimates: We can provide free estimates along the way of where your credit score will be once you finish the debt settlement program.
  • Credit Report repair resources: We will show you how to dispute incorrect items on your credit report for free. During the latter half of the program, we will work with you specifically to rebuild your credit score. If we are unable to offer our free help, we do have vetted, low-cost credit repair providers that we can direct you to.
 

Can you run a debt settlement credit simulation for me?

We would be happy to see how your credit score may be impacted. All you need to provide is to go through the debt settlement calculator below and click “Analyst Review”. We will then reach out to do a credit score simulation for you.
 
Debt settlement can be an excellent way to get out of debt and achieve financial freedom even if the credit score is temporarily negatively affected. Whether it’s best for you depends on each individual as everyone comes to the table with different experiences and goals. Generally, we decide what’s best based on a combination of your goals and preferences, mathematical equations of your income and expenses, and a full understanding of what will save you the most money and allow you to best achieve debt freedom.

 Is Debt Settlement right for me?

You may be wondering how other forms of debt relief such as debt management or bankruptcy would affect your credit score. These are great questions that should be explored. Ascend specializes in each of these debt-relief options, so if you take the debt settlement calculator and click “Analyst Review” at the end, we’d be happy to do a free review of how each of these options may impact your credit score.
 
Regardless, before signing the dotted line for debt settlement, we would always recommend comparing each of your options holistically to make sure that you are getting into the right option. When we started Ascend, we realized that there were far too many people getting misplaced in the wrong debt relief option because they did not consider each of the options holistically beforehand.
 

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Synthia DuBose

 08/21/2023

My family was grappling with the burden of credit card debt. We had explored various avenues, including debt relief companies and consolidation loans, but everything seemed dubious and left us feeling uncertain. That all changed when I came across Ascend and had the opportunity to connect with Justin. He reached out to me on the very same day, and from that point forward, things took a turn for the better.

I provided Justin with an overview of our financial situation, our objectives, and the timeline we hoped to achieve our goals within. He promptly outlined the possible courses of action and presented a thorough breakdown of our various options. What truly stood out was Justin’s approach—he never pressured me into making a quick decision. Instead, he offered me the information and allowed me to ask questions at my own pace.

Upon selecting the path we wanted to pursue, Justin facilitated our connection with a non-profit organization. Much to our delight, they exhibited the same level of courtesy, expertise, and patience that Justin had demonstrated. In retrospect, the entire experience instilled a sense of confidence within us. We now believe we have a solid foundation and are well on our way to achieving financial success!

Dahveed Krisna

 07/26/2022

Ben and his assistant Jeffrey from Ascend Finance did an awesome job helping me to find an attorney who could talk with me openly and honestly about Chapter 13 as an option for my financial situation. Before finding out about Ascend’s bankruptcy calculators, I was stuck on a wheel of countless offers for consolidation loans, but always steered towards debt settlement or debt management plans over and over again due to my credit score and high utilization percentage. Based on data I entered into Ascend’s calculator, Ben and Jeffrey reviewed my situation and quickly connected me with a skillful, experienced bankruptcy attorney. I finally feel like I’m on the best path to being debt free; one that will save me a lot more money than any of the debt settlement or debt management programs that other companies and agencies have offered me… THANKS Ben, Jeffrey and Ascend!!

JorJor Binks

 02/09/2024

These guys are truly a beacon for those of us with too much debt. From the start where I found Ben on the YouTube channel Ascend I have been treated as a real person by real people. Even getting a personal call helping me figure things out. I went through one of the lawyers recommended by Ascend and as of January 2nd I am debt discharged, and already have a great credit card from Mission Lane for $2000. Things are getting back into place and my life feels so much less stressful due to the weight of debt being off my shoulders.

PLEASE give these guys a call if you are even considering any sort of debt relief be it bankruptcy, consolidation, or whatever other types of debt relief are out there. I can’t thank the Ascend team enough. (I was not paid to post this, or told to do this. I am genuinely so thankful to have the help when I needed it most♥️)

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