When you go in for a debt settlement program, most good debt settlement companies inform you that the program can have an impact on your credit ratings.
In fact, as part of the amendments made to the Telemarketing Sales Rule by the Federal Trade Commission, providing this information to the consumers is one of the mandatory disclosures that a debt settlement company is legally bound to make.
Though many debtors fail to understand the seriousness of this and see debt settlement as a good way of getting out of debt without filing for a bankruptcy, it is important that you know the implications that debt settlement can have on your credit score.
Under the debt settlement process, you enter into an agreement with your creditors to pay back a reduced amount of the debt within a stipulated period of time.
This amount that the creditors finally settled on is usually the amount that you would have paid on the debt if you had not been charged any interest on it.
The creditors may provide you the option of making the repayment as a lump sum payment or through installments.
However, while the creditors look forward to recovering as much money as they can from you through the settlement process, they could also severely impact your credit report.
After you repay the amount, the creditor will update your credit report to report that you have paid the account and also specify that you have paid back less than the amount that was initially agreed upon.
This information would remain visible to any creditors to whom you make credit applications in the future and they may hesitate to give you a loan.
This could impact your credit score and greatly limit your purchasing power in the future as you could end up spending more money in utility deposits and interest rates or even be denied for applications that are made on the basis of credit like employment and leases.
It is therefore important that when you negotiate with your creditors, you work out a deal by which the creditor would delete the information from the credit report or at least give you an account listing that is not too harmful for your credit score like "paid" or "paid in full".
Also make sure that you get this negotiated credit listing in writing as part of the agreement that you sign with the creditors.