Here’s a new fact for the 2019 tax season–millions of Americans who were planning on using their tax refunds to pay down debt won’t be getting a refund this year. Rough numbers so far indicate that over 30 million taxpayers will actually owe income taxes–and if you’re one of that number, you can forget getting your credit card debt under control.
Settling Your Debt
Now might be the time to consider settling your debt–working out an arrangement with your creditors that gives you lower payments. There are a number of ways to settle–lower interest rates, forgiveness of accrued interest from late payments, and forgiveness of part of the balance due. The end result is that you pay the third-party debt negotiator a lump sum each month, and in turn they pay your creditors on your behalf.
There are several advantages of debt settlement-tangible and intangible. The tangible ones are obvious: you’ve gotten aggressive collection agencies off your back, you’re back on track paying your bills, and you’ve got improved cash flow every month. The hidden benefits are really more important: you’re under a lot less stress, you’re probably sleeping better, and better able to focus at work. In a lot of ways, there’s no real downside to a debt settlement plan.
How Debt Settlement Impacts Your Credit Report
There’s always the cloud that hides part of a silver lining, and in the case of debt settlement it’s the impact on your credit report. Here’s the reality: a debt settlement plan will have a negative effect on your credit score, and yes, it stays there for seven years. While that might seem to be a scary prospect, let’s look at two things: how your debt works, and how credit agencies work.
Credit Cards are Backed by Contracts
No matter how quickly you’re approved for a new card, ultimately you sign an agreement that you agree to the interest rate, credit limit, and monthly payments, based on your outstanding balance. When you pay less than is due, or stop paying, the card issuer will not only hound you with phone calls–they’ll report the late or short payments to the credit bureau.
When you renegotiate your debt, you’re basically walking away from your contractual obligations and rewriting the deal, so the card issuer will close the account. This is reported, and your credit score reflects that account information.
Credit Reporting Agencies Hold the Cards
There is absolutely no way to project how much a settlement will impact your scores, and when they will start to creep back up. Credit reporting agencies have complicated algorithms that determine how much numbers change. Those calculations are based on these five factors.
- history of delinquency
- amounts owed
- length of credit history
- new credit opened
- types of credit used
Seven Years Starts Today
If your finances are stressed to the point you are considering a debt settlement plan, chances are pretty good that you’ve already missed some payments on your cards. Whenever money is tight, those are usually the first payments to go, but you keep paying your mortgage and car payments. Keep on paying them, no matter how painful–maintaining your installment debt buoys your credit score when you settle revolving debt.
The more debts you settle, the greater the negative impact on your scores. If you can keep some revolving debt open and active, that will also help your credit recovery. Keep in mind that once your bad debts quit reporting, your good ones will continue throughout those seven years.
Managing your debt is overwhelming, but you don’t have to go it alone. DebtBlue is here to help you through the settlement process–call or get an online estimate of your monthly savings. You can start rebuilding your credit and your life today.