How Does A Credit Card Settlement Affect Your Credit Score?

A settlement credit card affects credit score by lowering the borrower’s credit rating. Every debt settlement is recorded for seven years, which can be a long time for some people to rebuild their credit score. However, the credit score is already negative since the account has been in collections for some time, and the borrower has missed several payments. Adding a settlement will not significantly decrease it.

What Are Credit Scores?

Credit scores are numerical values that represent an individual’s creditworthiness, and lenders use them to determine whether or not to extend credit and interest rates. Credit scores are calculated using a variety of factors, including repayment history, current debt levels, and credit utilization. A high credit score indicates a low risk of default, while a low credit score indicates otherwise. As a result, individuals with high credit scores can access better loan terms and rates.

Moreover, credit scores are important in financial decision-making, and consumers need to understand how they work. By staying informed about their credit status, consumers can take steps to improve their credit scores and make themselves more attractive to lenders. In the end, having a good credit score can save you money and help you achieve your financial goals.

Many factors affect your credit score; one of them is whether or not you have any delinquent accounts. If you have a delinquent account, it will stay on your credit report for seven years from the date of the last activity. If you settle a debt for less than the total amount, it will still appear on your credit report as a delinquent account. In addition, creditors will also report the debt as “settled for less than the full amount,” which can have a negative impact on your credit score. However, if you can negotiate a settlement with your creditors, it can be an effective way to reduce the amount of debt you owe and improve your credit score over time.

Can You Make A Settlement With A Credit Card Company?

Once you start missing payments on your credit card debt, your credit score starts to dive. When the debt reaches collections, your credit rating may be so far down that negotiating a settlement will not cause it to slide further. 

While it’s better to pay a debt in full than settle it, if you don’t see any other way, go for settlement instead of defaulting on the loan. Settling allows you to pay less than what you already owe. It will help you get over your debt, and with time, you can slowly rebuild your credit score. 

How To Negotiate Debt Settlement With Credit Card Companies

You can settle directly on your own or get the services of a reputable debt settlement company. Credit card debt settlement laws protect borrowers from fraud and harassment that can be prevalent with the number of bogus debt settlement companies and unethical third-party collectors. If you decide to attempt settlement on your own, keep in mind the following:

  • Put everything in writing, especially any agreed terms. This will protect you in case challenges come up later
  • Expect to pay anywhere from 40-70% of the total amount owed. Most creditors will demand this as a lump sum, but you can always negotiate a monthly installment 
  • Start your negotiations with the lowest amount you can afford. Typically, this should be 40%-50% of what you owe
  • Have some cash stashed away. Showing your creditors that you are ready to make the payments will benefit you in the negotiations
  • Be patient and persistent. A credit card settlement takes time and a lot of back and forth. It can be grueling, but those who persevere are rewarded

Is It Better To Pay Debt In Full Or Settle? 

Paying in full is always better than settling. This ensures that your credit score remains positive and you enjoy the benefits of a good score. If you are deep in credit card debt, consider other methods like debt snowball or debt avalanche before attempting a credit card settlement. 

You can also work with a debt management company or a credit counselor to understand your options for paying off debt. Make card settlement a last recourse and do your best to preserve your score. 

Lastly, remember the basic financial advice of spending less than what you make when you’ve paid off all your debts. This will help you avoid accruing debts in the future and help you build and maintain a good credit rating.

For more articles about wisely using your credit cards, check out the Processing Card’s blog section.

Was this article helpful?
YesNo
About the Author

Demystifying Level II and III Data: What It Does for Merchants

Enter you email below to receive the guide.

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

Processing Card will use the information you provide on this form to be in touch with you and to provide updates and marketing.

High-Risk Merchant Account For Credit Repair and Education

Enter you email below to receive the guide.

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

Processing Card will use the information you provide on this form to be in touch with you and to provide updates and marketing.

Understanding 3D Secure 2.0 Technology

Enter you email below to receive the guide.

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

Processing Card will use the information you provide on this form to be in touch with you and to provide updates and marketing.
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram