If I settle with a collection agency will it hurt my credit? Your credit score is an initial assessment tool for financial institutions when evaluating your loan application. It helps in determining your eligibility for a mortgage and can even impact your capacity to secure an apartment rental. Timely bill payments stand out as a vital method for your credit.
However, what if you have unresolved debt? Does reaching a settlement agreement with a collection agency hurt your credit? Indeed, a debt settlement can result in a decrease in your credit score. Nevertheless, it’s the best option you have.
If I settle with a collection agency will it hurt my credit?
Indebtedness can hurt your creditworthiness. Consumer credit scores, which typically fall between 300 and 900, indicate the quality of your credit, with higher scores indicating stronger credit. The Consumer Financial Protection Bureau has identified over 60 scoring methodologies, making it clear that there isn’t a single universally accepted formula for calculating credit scores. Nonetheless, your score is generally influenced by several factors, including:
- Payment history (35%)
- Debt amount (30%)
- Credit history (15%)
- New credit (10%)
- Credit mix (10%)
Note that indebtedness plays a significant role in the calculation of your credit score, accounting for approximately one-third of the overall score. The presence of unresolved debt can lead to a decrease in your score, although the extent of the impact depends on the amount of debt you owe and the duration of its existence.
What is debt settlement?
Debt settlement refers to the process of reaching an agreement wherein you agree to pay a partial amount of your outstanding debt, and in exchange, your creditor forgives the remaining balance. While it is possible to negotiate a debt settlement directly with your creditor, it is common for creditors to transfer the debt to a collection agency, which then pursues you for debt recovery.
Many companies and collection agencies are open to accepting a reduced debt settlement, as it allows them to receive immediate payment while avoiding the time and expenses associated with legal proceedings. If you find yourself burdened with unpaid debt, a settlement is typically the fastest and most cost-efficient way to regain control of your financial situation.
How debt settlement affects your credit score
Credit bureaus, for example, Experian, prefer to observe the notation “paid in full” alongside your outstanding debts. However, this option is unavailable when you choose to settle. Settling your debt will negatively impact your credit, resulting in a lower score compared to paying off the debt in full.
Nevertheless, settling debt will have a lesser detrimental effect on your credit score compared to leaving it unpaid entirely. Consequently, debt settlement can aid in your financial recovery and help in building your creditworthiness for the future.
The NFCC (National Foundation for Credit Counseling) estimates that debt settlement causes a credit score decrease of 100 points or more in most cases. Thus, this may negatively affect your credit history for up to 7 years.
Nevertheless, the precise repercussions may differ among individuals and can be influenced by the extent of debt settled. For example, someone with an initial credit score of 800 may experience a more pronounced impact compared to someone with a lower score.
If your credit score has already been hurt due to previous debts or late payments such as rent, the impact of debt settlement is likely to be less significant compared to a scenario where the initial credit score was higher. Furthermore, debt settlement is preferable to completely defaulting on payments.
Advantages of debt settlement
Despite the potential negative impact on your credit score, settling a collection agency is a viable and advantageous option. Debt settlement can expedite the process of eliminating your debt. Once your debt is resolved, you can focus on rebuilding your credit.
If you face a lawsuit over your debt, make sure to respond with an Answer to prevent a default judgment in favor of your creditor.
How to settle a collections debt in simple steps
Debt settlement can be accomplished through a streamlined process consisting of several straightforward steps. Firstly, you need to file an Answer when faced with a debt-related lawsuit. This response is crucial to protect your interests and avoid a default judgment. Next, you can make a settlement offer to your creditor, expressing your willingness to resolve the debt. You must obtain the final agreement in writing to ensure clarity and prevent any misunderstandings.
For a more comprehensive understanding of the debt settlement process, you can refer to the breakdown of each step below. Additionally, a helpful video is available to guide you through the process of settling your debt.
1. File a written Answer
If you face a debt lawsuit, you need a strong defense by submitting a written Answer within the state deadline. Failure to respond may result in a default judgment being issued against you, holding you liable for the entire debt. So, file an Answer even if you have reached a settlement agreement with your creditor or collection agency to prevent any attempts to obtain a default judgment bypassing your involvement.
2. Present an offer
With the submission of your Answer in your case, you have laid the foundation for initiating settlement negotiations. Now, assess your financial capacity to determine the amount you can reasonably afford to repay, while also considering the potential willingness of the collector to accept an offer. In many instances, debt collectors are open to settling for a fraction of the original debt amount, acknowledging a percentage-based resolution as a favorable outcome.
When engaging a debt settlement company, the typical average debt settlement achieved is approximately 50%. Note that attaining a 50% settlement is not without its challenges. In most instances, securing an 80% settlement is relatively straightforward, as creditors and debt collectors are often inclined to accept this reduced amount.
Generally, debt settlements tend to fall within the range of around 60%, which is a commonly observed outcome.
Let’s consider the case of Lauren who finds herself facing a debt collector’s lawsuit for $7,000. After assessing her available funds, she determines that she can afford to pay off $5,250, equivalent to 75% of the debt. After thorough research, she surmises that the debt collector may accept settlements as low as 60%, translating to $4,200. Using SoloSettle as her platform of choice, she submits a settlement offer of $5,000, aiming for a middle ground. Following several rounds of negotiations, Lauren successfully secures a debt settlement agreement for $5,000. Through this achievement, she saves a substantial $2,000 and experiences a renewed sense of financial stability.
What if the collections decline your offer? There is no need for concern as it signifies an opportunity to proceed with further negotiations. It is common for the creditor or debt collector to respond with a counteroffer, so be prepared for the next phase of discussions when submitting your initial offer.
3. Ensure the conclusive agreement is documented in writing
To avoid potential complications, refrain from sending your settlement payment until you have obtained a written agreement. Failing to do so could expose you to creditor attempts to obtain a default judgment, leading to additional financial obligations. When you are prepared to make your payment, prioritize the security of your sensitive financial information.
Do you need debt settlement?
Unfortunately, a debt settlement will inevitably affect your credit score negatively, and there are no available strategies to evade this repercussion. Nevertheless, settling collections agency remains a better alternative when compared to shouldering an insurmountable debt load beyond your means to repay.
So, to conclude “If I settle with a collection agency will it hurt my credit?” Collections debt settlement can mitigate the decline in your credit score compared to the consequences of disregarding your debt entirely. Ultimately, it allows you to restore your financial stability and rebuild your creditworthiness.