A series of credit cards next to a screenshot of a persons credit score on a computer

The Pros and Cons of Settling Debt

Milad Hassibi August 21, 2019

It can be easy to find ourselves under a mountain of debt in a short period of time. Falling into debt is a challenging and stressful situation. However, many consumers are able to repair their financials faster when they decide to settle their debt. Settling debt means that the primary lender (bank or other financial institution) has accepted to take less than the original amount you owe.

If you are unsure of whether you should settle your debt, here are some pros and cons.

Pros of Settling Debt

Credit Score Increase

A woman smiles after settling her debts

Carrying a large balance can only negatively impact your credit score. Credit utilization, or how much of your available credit you use, plays an important role in your credit score. A high utilization ratio can be disastrous for your score.

When you settle a debt, you may find that your credit score increases. This is largely due in part to your credit utilization ratio decreasing. Although your score may not change overnight, you will notice changes to your score with time.

Lower Payments

High monthly payments can spell disaster for those of us with less-than-perfect credit scores. Carrying a large balance often means making a large interest payment each and every month. If you’ve fallen behind on your bills, you may clearly know how much of a burden interest can be.

Get a Cleaner Credit Report

Once you settle your debts, your credit report will become much more polished for potential lenders. Carrying a large amount of debt while applying for additional lines of credit could signal to lenders that you are in a cash bind.

Sadly, your credit report will show that you have “settled” debts in the past, however, in many situations, the pros far outweigh the cons.

Cons of Settling Debt

Debt Settlement Fees

Debt settlement is usually conducted by a trained debt settlement company, who may employ debt experts to help you against your creditors. However, debt settlement is not a free service. Legally, debt settlement companies cannot collect any fees unless they have reached a settlement on your behalf, and you have made at least 1 payment to a lender as a direct result of that settlement.

It is also important to understand how a debt settlement company plans to charge you. You may be charged a monthly base fee followed by a percentage of the money saved from negotiation.

For instance, if you have a $20,000 debt that was settled down to $10,000, the debt settlement company may charge you a 50% fee of the reduced amount, or $5,000. This would make the total you owe $15,000.

Potentially Even More Debt

Many debt settlement companies advise their clients to stop paying their debts entirely. This makes it so lenders feel the pressure as you stop payments. Unfortunately, refusing to pay your debts can get expensive, as debt settlement can take anywhere from a year to 3 years to work. In that time, you may accumulate large amounts of fees and penalties.

Final Note

The road to becoming debt-free can be difficult but not impossible. If you or a loved one are in debt and are looking to get a fresh start on your finances, CrediReady can help. Our network of trusted and verified attorneys are prepared to give you a 100% free no-obligation bankruptcy consultation. To learn more, fill out our free consultation request form here.

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