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Other product and company names mentioned herein are the property of their respective owners. Licenses and Disclosures. Advertiser Disclosure. By Jennifer White. Dear Experian, Will it affect my credit scores if I settle a debt for less than the original amount?
Dear JYS, Yes, settling a debt instead of paying the full amount can affect your credit scores. Settling an Account Is Better Than Not Paying at All Although settling an account is considered negative, it won't hurt you as much as not paying at all. How to Begin Improving Your Credit Score If you've had financial troubles in the past, but now you're working to improve your credit , you're on the right track.
More tips for building and maintaining good credit scores include: Make all payments on time going forward. Your payment history—whether you make all payments on time—is the most important factor in credit scores.
If you are ever in a situation where you may not be able to make a payment on time, you should contact your lender to discuss your options before the account becomes delinquent. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
Because debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences.
For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.
Before you enroll in a debt settlement program, do your homework. Check out the company with your state Attorney General and local consumer protection agency. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is. Enter the name of the company name with the word "complaints" into a search engine. If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party.
The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.
A company can charge you only a portion of its full fee for each debt it settles. For example, say you owe money to five creditors.
The company successfully negotiates a settlement with one of your creditors. The company can charge you only a portion of its full fee at this time because it still needs to successfully negotiate with four other creditors. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee.
If the company's fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount it represents. This may be called a "contingency" fee. Before you sign up for the service, the debt relief company must give you information about the program:.
Depending on your financial condition, any savings you get from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, which the IRS considers income, unless you are "insolvent. Insolvency can be complex to determine. Talk to a tax professional if are not sure whether you qualify for this exception.
Working with a debt settlement company is just one option for dealing with your debt. You also could: negotiate directly with your credit card company, work with a credit counselor, or consider bankruptcy. Talk with your credit card company , even if you have been turned down before. Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free. You can find the telephone number on your card or your statement.
Be persistent and polite. Try negotiating settlements with credit card companies or other creditors on your own. If you have credit card debt, consider a balance transfer. Nonprofit organizations may provide credit counseling services that offer free or low-cost advice on budgeting and debt management. But a credit counselor may work with creditors on payment plans or to stop late fees or efforts like collection calls.
Do your research. The Federal Trade Commission helps protect consumers by trying to prevent unfair business practices in the marketplace. Pick a reputable debt settlement service provider. Before you enroll in any debt settlement program, the Consumer Financial Protection Bureau recommends contacting your state attorney general and local consumer protection agency to check whether there are any complaints on file.
The Better Business Bureau has consumer reviews of businesses that could help you as you research a debt settlement service provider. Read this post in Spanish. Image: Businessman using laptop in a modern office, looking serious. Paying off a debt for less than you owe may sound great at first, but debt settlement can be risky, potentially impacting your credit scores or even costing you more money.
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