When you settle on a debt, such as a canceled credit card, ultimately it can hurt your credit. High credit scores are designed to help people who manage their debt successfully. In certain situations, it might be warranted to settle on an outstanding debt. Let’s take a look at the pros and cons of negotiating with creditors on outstanding debt to help improve your overall credit.
When does a debt become problematic?
A debt will start hurting your credit score the moment you go into delinquency. Depending upon the type of missed payment, a late payment can drop your credit score by as much as 180 points. The creditor typically doesn’t report a late payment until 30 days after it was due. When an account becomes delinquent, it is better to try and pay it off. However, settling allows you to pay off an amount that is less than what you owe. In short, a debt becomes delinquent about 60 days after payments are missed consistently and this varies from creditor to creditor. For a credit card, 30 days might be the point of delinquency.
Alternatives to settling a debt
When you are working with a creditor, you may have other alternatives if you cannot make a payment. However, you have to act before you miss your first payment:
- Forbearance: This is an option that many credit cards and other loan programs may have. This allows you to miss a payment without penalty. However, you may have to still pay accrued interest.
- Ask about hardship plans: In many situations, your credit card company or lender may be willing to work with you. If you can’t make the minimum payment, you might be able to get a hardship plan, which could allow you to make payments for a short term that are within your budget.
- Ask about insurance and other protections when taking out credit: Some lenders offer insurance if you become unemployed or face some other type of hardship. These types of programs usually have a timeframe of a year.
- Seek a credit repair service: A company like Tony’s Credit Repair can help you analyze your finances and come up with a plan to get back on track financially.
Getting your finances in order
There are times when settling on a debt might be your only option. After several missed payments, it’s better to settle on a debt. Once you clear that settlement with the creditor, you will be able to start repairing your credit. The best option when you are in danger of falling behind on payments is to act before it becomes a problem.
A credit repair company has resources to help you rebuild and revitalize your credit by building a plan to move forward.