Is debt settlement worth a lower credit score?

If you're struggling with your credit card debt, you may have heard credit card companies and debt collectors are often willing to settle for less than you owe. This is done through a process called debt settlement or debt forgiveness. And while this can offer meaningful savings, it can also hurt your credit. 

In fact, debt settlements can negatively impact your credit score for up to seven years. And, the fact that you settled an account for a smaller amount may not be the only aspect of these programs that hurt your credit. The process typically involves missing payments, which can also detrimentally impact your score. 

You may wonder if debt settlement is even worth it considering the credit impact these programs usually have. That's what we will break down below. 

Chat with an expert about your debt settlement options now. 

Is debt settlement worth a lower credit score?

Not sure if debt settlement is worth the potential damage to your credit score? Here's when it may (and may not be): 

When debt settlement may be worth a lower credit score

Do you consistently make late payments or miss payments altogether? Is the burden of your debt weighing on your budget and forcing you to make tough financial decisions regularly? If you answered yes to these questions, the harm to your credit score may be worth the financial relief debt settlement programs provide. That's especially true if you've tried other debt relief options, like debt management and consolidation and still need assistance. 

"Debt settlement might be worth a lower credit score when you're unable to manage your debt through other means and risk defaulting or declaring bankruptcy," explains Michael Broughton, founder and CEO of the credit-building app, ALTRO. "It can provide relief by reducing the total debt owed, making repayment more feasible."

Debt settlement programs may cut your balances substantially. And, that could mean you can get out of debt in a reasonable amount of time making lower payments than you're making right now. 

It's also worth noting that it can be hard to qualify for new loans if you're already struggling. And, once you put your debts behind you, you'll have improved financial stability and the ability to improve your credit score. So, while debt settlement may hurt your credit, the overall financial benefits of these programs may be worth the credit impact. 

Get the relief you need with a debt settlement program today. 

When debt settlement isn't worth a lower credit score

While debt settlement may be worth a lower credit score for some, it may not be for everyone. You should avoid debt settlement if: 

• You can afford your monthly payments.
• You haven't explored options like debt management and consolidation. 
• You expect to regain financial stability soon. 

Debt settlement "may not be worth it if you can manage your debt through other strategies like budgeting, debt consolidation or a debt management plan, as these options can reduce financial stress without severely impacting your credit score," says Broughton. 

Ultimately, debt settlement programs are best used as a last resort attempt to avoid bankruptcy. While they can provide substantial relief, you should exhaust all other options before taking advantage of them. 

Ways to improve your score after settlement

You won't have to deal with bad credit forever, even if you decide to move forward with debt settlement. You can do a few things to improve your score after successfully settling your debt.

• Take advantage of credit repair services: Credit repair services employ professionals who have a deep understanding of how credit scores work and factors that can improve them. You could realize notable improvements in your credit score by employing one of these companies.  
• Get a secured credit card: Secured credit cards are similar to their traditional counterparts. But, they require a security deposit that the financial institution typically uses as your credit limit. If you use the card properly, making all payments on time and keeping your credit utilization low, these accounts could speed up the credit repair process. 

The bottom line

If you've tried everything you can to get out of debt and still struggle to make monthly payments, settlement may be the right option for you, regardless of the credit impact. But if you can afford your payments, you expect your financial situation to improve soon or you haven't given other debt relief options a try, debt settlement may not be worth a lower credit score. Get in touch with a debt relief expert to talk about whether or not debt settlement makes sense for you now.