Debt Settlement and Your Credit Score

by Tom Gibson on September 13, 2012

How Debt Settlement Can Resolve Your Debt
(And Improve Your Credit Score At the Same Time)

In those short seven months of unemployment Sam’s credit card balances had maxed out at $30,000. With a family of four, his unemployment checks did not cover all his household expenses and he had to rely upon credit to make ends meet.

Although it was a good job with decent pay, Sam struggled to keep up with the minimum payments on his credit cards. He was considering getting help with a debt settlement company to get his debt under control, but he was concerned about the impact it would have on his credit score.

How Debt is Affecting Sam’s Credit Score

What Sam didn’t realize was that his credit score was already being effected by his current debt situation. About 65% of his credit score was determined by only two components. These two components, payment history and credit utilization were actually working against each other.

Payment History

This is the component that Sam was concerned about. He had always made his payments on time and he took pride in that. He knew that if he utilized a debt settlement company, his payment history could be affected.

Outstanding Debt

Little did Sam know that the outstanding balances on his credit cards were bringing his credit score down. 30% of his credit score was based on how much debt he had. By keeping up with his payments, he was actually hurting his credit score. (A maximum of utilization 30% of available debt is still considered healthy for your credit score.)

By making the minimum payments it would take 5 years and $17,918 to pay down his debt far enough so that it would not have a negative impact on his credit score.

By making the minimum payments on his $30,000 of credit, it would take Sam 22 ½ years to pay off his balance and cost him $26,399 in interest.

How Debt Settlement Improves Your Credit Score

Rather than focusing on maintaining his payment history, Sam could instead focus on resolving his outstanding debt. By using a debt settlement company to settle his debts, he may be able to resolve his $30,000 of debt in less than a year and then enroll in a credit repair program to clean up his credit score.

Within 2-3 years Sam may be able to have his debt paid off, a healthy credit score and even saved 10′s of thousands of dollars in interest fees.

 

 

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