What Does Debt Settlement Do to Your Credit?

A debt settlement is an agreement you make with your creditors to pay less than you actually owe in one lump sum, to settle your debt. It can help you remove debt quickly but before you take on this solution it’s important you understand the effect it has on your ability to get credit.

What does debt settlement do to your credit score?

Debt settlement can potentially impact your ability to get credit. This is because a debt settled at a reduced rate will be listed on your report, for future lenders to see. It suggests that you were unable to make repayments as agreed and could be a risk.

Any  County Court Judgments or default notices linked to the debts you have settled, will also still be listed on your report for six years from the date they were issued. A debt settlement cannot help to remove these or lessen their impact on your score.

Debt settlement will only work for those who are confident they won’t need more credit in the near future, as it can settle debts quickly and let you use what money was being paid to your creditors. There might be better debt solutions out there for you though, such as Debt Management Plans and Individual Voluntary Arrangements and our team can help you decide which one is the best choice for you.

Will debt settlement improve my score after late repayments?

Debt settlement can help improve your score if you have been late on repayments to this point. We don’t advise however that you use it to settle debts that have been continuously paid on time and in full, as this could impact how you appear to lenders when you apply for anything in the future. Instead, continue to make your agreed repayments.  

If you are able to make repayments comfortably and want to get rid of your debt quicker then that’s brilliant news. In this case, it might be time to speak to your lender about increasing the amount paid each month or putting spare pennies into a savings account that can be used to pay off larger instalments of debt.  

Just ensure you feel comfortable before making a decision like this – we always need a little spare cash for those everyday emergencies to avoid debt trouble in the future.

How long does debt settlement stay on my credit report?

A debt settlement agreement will be listed on your credit report for six years. This can make it tricky later on to get large amounts of credit at a good interest rate – such as a mortgage – because the lender may see you as a risk.   

Over time though, the debt settlement will have less of an effect on your ability to get credit, as you continue to build up good credit and work to manage your borrowing sensibly. When it drops off your report at the end of the six years your score will increase and you have the chance to improve it further.

If your credit score is low, responsible borrowing is the only way to improve it, which involves taking on small amounts of debt and repaying this off on time. Try to steer clear of quick fixes – such as credit building credit cards – that may cause more harm than good.

If you need any advice when it comes to debt, then get in touch with our friendly team here at PayPlan who can help you get back on your feet. We can find you a solution that works for you, to help you get back to truly living again.