Can Debt Arrangement Hurt Your Credit?
Debt arrangement is another term for debt settlement. For some people suffering from excessive debt, debt settlement is an alternative to bankruptcy. Debt settlement resolves delinquent debts such as credit card debt through an agreement with the creditor or debt collector. Usually the settlement is for less than the full balance on the account. The arrangement pays off the account but is harmful to credit.
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Credit Reports
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The three major credit bureaus, Experian, Equifax and TransUnion, update credit reports after a debtor pays off a bill through an arrangement such as debt settlement. The credit bureau usually notates the account as “settled for less than the balance” or “settled.” That alerts future creditors that the debtor failed to pay the account as agreed. The notation greatly harms credit because it suggests that the debtor is not trustworthy when managing credit.
Credit Scores
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Credit scores range from 300 to 850, but it is impossible to say exactly how much credit scores are impacted by debt settlement, as it greatly depends on personal circumstances. MSN Money reports that creditors will not offer debt settlement arrangements until an account is about three months past due. After that, it could take a few more months for the debtor to save money for the settlement. In the meantime the debtor’s credit score could fall each month because of missed payments. It is impossible to engage in debt settlement and maintain a high credit score. (Scores of 720 or higher are the best for obtaining credit cards and loans at low interest rates.)
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Agencies
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Some for-profit firms specialize in debt settlement, but the Federal Trade Commission recommends that debtors avoid the companies. Some are legitimate but the FTC has accused others of charging high fees for poor services. A debt settlement firm could advise a debtor to stop making payments on bills to qualify for settlement arrangements. Doing so could cause the debtor’s credit score to rapidly drop. Debtors who feel they must engage in debt settlement should do so on their own by contacting creditors and debt collectors directly.
Credit Repair
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Settlement information remains on credit reports for seven years, and no one can legally or ethically remove it sooner, according to the FTC. There is one loophole, however. Some creditors or debt collectors may agree to so-called “pay for delete” arrangements. The agreement allows for complete removal of the account from credit reports in exchange for payment. However, not all creditors and debt collectors offer this arrangement.
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