Is it possible to settle debt without hurting your credit score?

Is it possible to settle debt without hurting your credit score?

The simple answer would be a big “NO”

But there are certain aspects you may need to know first.

Most of your credit card debts and loans are directly reported to the 3 major credit bureaus every month. Each of your credit account statuses are regularly added on to your credit report showing whether you are late with your payments or whether the account is paid or closed.

When you settle your debts, the creditor would update your credit report with the status of “Settled” or “Paid as Settled.” The former status is naturally better than the later one, but any other payment status on the accounts except “Paid as agreed” or “Paid in full” may harm your credit score.

In debt settlement, you aren’t paying your dues full as you have agreed to the creditor. So, debt settlement will definitely have a negative impact on your credit score. Your credit score is dependent on a few factors, so the exact impact on your score may vary considering the other information on your credit report. However, it’s quite sure that debt settlement may have a significant effect on your credit score.

But is there any way you may settle your debts without hurting your credit score? Of Course… there are some options which may indirectly help you to settle your debts and get out of the situation. Let’s have a look at them closely.

How to settle the debt without damaging credit

One thing is sure, you need to create a fund or a reserve to pay off your debt. When you have saved enough money to pay off your debts, you may try to negotiate with the creditor for lowering the debt amount.

1. Choose which debt to handle first

If you have multiple credit cards, payday loans, medical bills, and other unsecured debts, then you should focus on settling one debt at a time. Use one of the following methods:

  • Pay off the debt with the highest interest rate. This debt may cost you the most in interest, so settling it off first may save you money. You should make the minimum payments on all other credit cards and regular installments on loans. Once you pay that debt off, you may target the next account with the highest interest rate.
  • Pay off the account with the smallest debt balance. This may cost you more as you are ignoring the higher interest debts. However, this strategy might give you a positive momentum as you’ll be paying off an account sooner than you think. As you pay off one account, your confidence may get a boost.

If you want, you may negotiate with the creditor at any point in time.

2. Creating a budget

To settle your debts, you may need to live within your means. Basically, you must free up as much money as you could for contributing toward your debts. Take a deep breath and create a budget:

  • Make a list of fixed expenses. Normally these things may cost the same every month: rent/monthly mortgage payments, the premium for health insurance, car payment, food expenses, etc.
  • Add new variable expenses. They may change each month. Variable expenses are basically luxuries like dining out expenses, gym memberships, Netflix charges, etc.
  • Take measures to reduce your variable expenses as soon as possible and contribute the money saved towards debt payments.

3. Find a part-time job

Apart from lowering your expenses, you should also increase your income. Find a part-time job or try freelance work online. Don’t miss out any opportunity to explore new side hustles that may increase your income and help you to settle your debt on your own.

The money from side hustle may add up funds quickly. For example, you might get a job for $30 an hour. If you work 30 hours a week, you can earn an extra $900 before taxes. Over a period of 1 year, you will have gathered about $43,200.

4. Sell your unused goods

You can earn money by selling unused things that you own. In fact, you might be able to sell things that got you into debt. Search your home for such things and locate anything that you can find useless. Sell it on eBay or in a yard sale. Engage all the money to pay off your unsecured debts.

5. Ask for a lower interest rate

Once you have gathered enough money to pay off your debts, you might want to negotiate your interest rate with your creditor. You can’t reduce the principal amount at all, it’s the interest which can be settled. Although you aren’t entitled to a lower rate, there’s no harm to ask.

Call your creditor, introduce yourself, and tell them how long you have been a customer. Ask the creditor if he can offer you a lower interest rate, so that you can repay your debts asap. You can also negotiate to settle the debts by paying less than what you owe. But you need to convince them to report your account as “Paid as agreed”.

6. Don’t close your credit cards after paying off

As you pay off your credit cards, you might think of closing them so that you will never be tempted to incur huge balances on them again.
However, closing too many credit cards within a little time gap can create a red flag on your credit card report.
A better option would be waiting for a few months before closing each card. For example,6 months or so. Closing several credit cards, especially the older cards, in a short period of time, can give creditors the indication that you are having a financial hardship and can’t afford to maintain multiple credit cards. Apart from that, closing old cards also remove a good credit history from your credit report.
Closing one card and waiting a few months before you close another is usually a better strategy to protect your credit score.

Conclusion

You must remember that the prime target of debt settlement is to wipe out some of your debts which you can’t afford to pay in full. That means you need to sacrifice your credit score for the time being, especially if you’re not going to apply for a big loan right now.
Once you’ve settled the balances, you must focus on rebuilding your credit score again. Since credit is depending on your borrowing, you’ll have to use credit cards responsibly for incurring more credit balances and take out loans to rebuild your credit. Paying your monthly payments is another important thing to remember. You’ll should become an ideal borrower by making on-time payments for loans and pay your credit card bills within every billing cycle. This way you may achieve a good credit score, and can avoid incurring more debts.