What Happens to Your Credit Score as You Stop Paying Accounts in a Debt Settlement Program?

To be blunt, as you stop making timely payments on your credit card accounts, you should expect to see a drop in your credit score.

Regarding timeline, your score will drop in the beginning of the program but overtime as accounts are eventually paid off, you will see an improvement in your overall credit worthiness. Your accounts will go from current (assuming they’re currently in good standing) to 30 days past due, to 60 days past due to 90 days past due, etc.

As each month passes and more accounts get settled, the accounts will be reported to credit bureaus with a zero balance. As each account balance goes to zero your credit score will eventually start to improve. Overtime this improvement will have a positive impact on your financial situation and your overall credit worthiness.

Now debt relief isn’t and shouldn’t be considered a credit repair option but it will eventually make you more credit worthy in the long term as accounts are settled and paid according to terms of settlement. It might seem like a bit of a rollercoaster ride in the beginning but your score will eventually come back and improve in the long term. If you have no debt and you completely paid off your accounts, lenders will want to lend to you more and you’ll be viewed as a better credit risk than someone who is still carrying all that debt.

Is Credit Really That Important?

Credit is only as important as the purpose you use it for. If you don’t plan on using your credit, it’s not going to add any value to your life. If you aren’t buying a home or acquiring a mortgage or applying for some loans, it’s utility remains to be seen.

People really tend to harp on credit and their credit score but at the end of the day, your credit score is just a number. It doesn’t define your self-worth and having a good credit score doesn’t make you a better person.

Debt Collections

Eventually as your accounts charge off, the creditor will take a tax loss on the debt and they will be written off for tax purposes. When the creditor takes a tax loss on the debt they can either sell the debt to a third party or they can continue to hold onto to it, in order to try and collect on the debt. While accounts are placed in collections the debt collection company that currently owns the account could report them to the bureaus in a debt collection status as well. So, you could see a different owner of the debt on your report as well.

About halfway through the program you should start seeing a big improvement in your credit worthiness and eventual increase in your ability to qualify for credit. As you pay down accounts one by one your score will dramatically improve and you’ll be able to actually see it bounce back over time. Depending on the type of accounts you have and how many accounts you have, by the time you are halfway through the program you should start seeing improvement in your score. At this point your score will be in an uptrend.

How Do the Accounts Go Reported?

This question can get asked quite a bit. Consumers are usually concerned about seeing a tarnish or red mark on their credit report. Due to this they can get cold feet when it comes to committing to a debt relief option. However, we don’t exactly know how all accounts will go reported.

In some instances, they will be reported as paid as agreed but this might be a little less likely. They are usually reported with an asterisk that says these accounts have been *settled for less than the full amount.

Otherwise there are some companies that actually delete the trade altogether when you opt to settle the account off with us. Some of the larger debt collection companies have started the process of doing this and have even begun to include it in their terms. Otherwise, this is not the default. Some collection companies can also report the debt as “paid as agreed”, “settled for less”, etc.

Either way the process itself has a lot of unknowns with regards to consumer credit. There is definitely a credit journey through the debt relief process but consumers’ best bet is usually just to not pay attention to credit too much until they are nearing the end of the program.

Looking at your score going down during the beginning few months of the process is just going to stress you out. These things take time and they will all be resolved at the end (so long as you stick to the plan) and your credit will be much better than it is as well.

Specific Credit Recommendations for Those Entering a Debt Relief Program

Make sure you are making timely payment and keeping current with all other debt accounts. Otherwise, your credit is simply not going to improve quickly. Making on time payments to auto loans, mortgages, secured lines of credit and anything else will help offset the negative impact from your debt relief program.

Get a Secured Credit Card

One of the best things you can do during debt relief program is to get a secured credit card. A secured credit card is going to help you build a good credit history. Secured debt is typically looked at as “good debt”. In terms of credit, good debt helps you maintain a good payment history on a secured account. Having a secured credit card will also diversify your credit portfolio which accounts for 10% of your credit score.

Secured credit cards are usually the number one recommend option for consumers looking to boost their score while they are in a debt relief program. You can open a secured credit card at any time since you are backing the card with your own collateral!

You can also convert the secured credit card into an unsecured credit card and receive your cash deposit back after you demonstrated good payment history on your card usually 6-9 months down the line.

Credit Builder Loan

Similar to a secured credit card, this option opens a loan under your name for the purpose of helping you build credit. This option offers less flexibility than the secured credit card since it’s a loan that has installment payments that are required to be paid back overtime.

I usually recommend the secured credit card over the credit builder loan since the secured card has more flexibility and can be converted to a conventional credit card after about 6-9 months of established credit history (sometimes even sooner)

Timely Payments on All Other Accounts

Making timely payments on all other accounts you have is vital to maintaining your financial health and counteracting any negatives associated with not making your credit minimums. This will help offset any of the negatives associated with the credit drop at the beginning of the program.

This should be a given. Anything that is not included in the debt relief program should be treated as regularly! Don’t stop paying all your bills, this will not help your situation!

Eventual Improvement and Good Credit

Eventually your credit score will increase to the point where you wouldn’t be able to distinguish whether you did a debt relief program or not.If someone is combing through your report and looking at notations, they might see that you were late and settled on the accounts but otherwise your score will come back and you will become much more credit worthy in the long term.

Lenders like to lend to those who have less debt

Lenders and credit card companies like to get out credit to those with no debt. This is unfortunately just the way of the world. If you have no debt and barely use your credit lines, lenders are lot more likely to want to give you good terms on credit opportunities.

The less you need it the more they want to give it to you. This is a catch-22 of the credit industry. Creditors like to offer those money who don’t need it because they are usually the ones with the least perceived risk. They want to try to avoid losses at all costs (even though they know they will happen and set asides a good amount of money to weather any short term, medium term and long-term losses they might get hit with).

Out of Mind Out of Sight

If looking at your credit score going down stresses you out, it might be better to not pay attention to your credit during the beginning part of the debt settlement process. You can start looking it at once some accounts have been settled when you’ll start noticing more improvements. This is probably the best way for those who are feint hearted regarding credit.