The single biggest objection to debt settlement for most people is the effect it has on your credit score. The truth is, your credit score will go down during the debt settlement process as your accounts will show late payments and sometimes charge offs. After you make a successful settlement, your account will show settled for less than full balance.
What people often don’t understand about credit or credit scores is that your debt to income ratio makes up a large portion of your credit profile. For example, mortgage companies use the 28/36 rule. This rule states that a maximum of 28% of your gross income can be used for your mortgage, insurance, taxes and HOA (also known as PITI) and 36% of your gross income can be used for your PITI and recurring debt (credit cards, medical bills, car loans, child support, etc.). This means that if you have $50,000 in debt and a 750 credit score, you aren’t going to be able to buy anything anyway!
If you are really worried about your credit score, ask yourself these questions:
- What am I going to need to buy on credit in the next 1-2 years?
- Why do I need good credit if I’m drowning in debt?
Ironically, having a good credit score may have gotten you into trouble in the first place as you had too much credit or it was too easy to get. Sacrificing your credit score temporarily to get out from under a mountain of debt will be more than worth it.
