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Pros and Cons Of Debt Settlement

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By : Brandon Johnson    99 or more times read

Jealousy is a natural emotion to feel after hearing of someone whacking their credit card bill in half through debt settlement. It seems so unfair to the rest of us struggling to make our monthly payments that those who are in the most financial trouble seem to get the easy way out. Likewise, it seems outrageous that companies would accept less than their due from someone who owes them money.

Despite any apprehensions, debt settlement occurs every day. A consumer purchases goods or services, suffers from either excess spending or loss of income, and is therefore unable to pay. Another cause may be a matter of principle, where a misunderstanding has occurred or the consumer simply dislikes what they have received and feels payment is unfair.

The creditor, on the other hand, also carries a valid case. They put down money to supply the product, and make it their business to receive a profit on that sale. While tax write-offs may lessen the financial hurt of unpaid bills, it is always in the creditor’s best interest to receive partial funds rather than none.

The benefits of debt settlement are enormous. Financially both parties come out at the top end of the bargain, while emotionally there is tremendous relief through peace of mind. Physical health may also improve, as your body no longer has to deal with all the stress that comes with being liable for a debt you are either unable or unwilling to pay.

What most people forget to take into consideration, however, is the effect debt negotiation has on your credit score. A “paid” collection on your credit report carries just as negative an effect as an “unpaid” collection. Additionally your FICO score can drop dramatically depending on your previous payment history.

Your credit score is determined by three major areas: payment history, debt-to-income ratio, and debt-to-credit limit ratio. Debt settlement affects your payment history. The amount of damage done depends on how you have been doing in the past.

If you have made your payment on time every time up until the point of debt settlement, your FICO score will drop dramatically. On the other hand, if you have missed a payment or been 30-days past due, debt settlement may not affect it as harshly. The first hit always carries more weight against your credit score than subsequent failures.

After knowing how badly debt settlement will affect the payment history of your credit mix, take a look at the other areas: debt-to-income ratio and debt-to-credit limit ratio. If you are already strong in these two areas, that strength will continue to support your credit score. If your FICO score is riding primarily on your payment history, however, it will sustain a much heavier loss.
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