Debt negotiation, also known as debt settlement, is a process where you negotiate with your creditors to pay off your debt for less than what you originally owed. This can be a good option if you’re struggling to make payments and can’t afford to pay off your debt in full.

However, before you consider debt negotiation, it’s essential to understand how it can affect your credit standing. While it can be a good option at first, it can also hurt your credit score.

How Does Debt Negotiation Work?

When you agree to a debt negotiation or debt settlement, you will be required to repay a certain amount of your debt, with a chunk of it being wiped off by the creditor.

You can get debt negotiation on your own by approaching your creditor and asking if it’s possible to settle even with a partial payment. Sometimes, the creditors themselves reach out to offer a debt settlement deal.

However, in many cases, you can use a debt settlement company’s assistance and let them do the work for you.

With debt negotiation, you can get dramatic savings out of the amount you owe, but it can also be risky and damaging to your credit score if you are not careful.

Why Can Debt Negotiation Affect Your Credit Score?

Debt negotiation is a good tool for resolving debt payment issues, but it’s essential to be aware that it can impact your credit score.

Negotiating with your creditors may report the new, lower payment amount to the credit bureaus. This could lead to a lower credit rating because your credit utilization ratio will increase. Additionally, if you miss any payments during the negotiation process, this will also be reported to the credit bureaus and could further damage your credit score.

If you’re considering debt negotiation, it’s important to weigh the pros and cons carefully.

While it can provide some relief to your current financial situation, it can still negatively impact your credit score, making it more difficult to get approved for new lines of credit in the future.

How Your Credit Standing Will Be Affected By Debt Negotiation

Debt settlement can have a significant impact on your credit score and credit standing. Below are some of the most critical effects to look into:

1. Amount Of Debt Included In Debt Negotiation

The amount of debt included in a debt settlement is one of the most important factors. The more debt is included, the more your credit score will be impacted. If you have a lot of debt, you may want to consider settling only a portion of it to minimize the consequences.

2. Standing Of Your Other Debts

If you have many other debts in good standing, the impact of debt settlement on your credit score will be lessened. On the other hand, if you have many other debts already negatively impacting your score, the negative hit on your credit rating will be magnified.

3. Current State Of Your Credit

Having a good credit score makes the impact of debt settlement less than if you have a poor score. If you have not been making payments on your credit card due to recent financial need, your credit rating will be struck even more by a debt negotiation activity.

4. Credit Reporting Practices Of Your Debtors

Some creditors are more forgiving than others when it comes to debt settlement. If you’re negotiating with a creditor known for being lenient, the impact on your credit score will be lessened. However, if you’re dealing with a creditor known for being tough, the impact will be the other way around.

Which Is Worse: Debt Negotiation Or Staying Current?

There are pros and cons to both debt negotiation and staying current on your payments. Ultimately, the best option for you depends on your particular financial situation.

If you’re struggling to make your monthly payments or are already behind on your debt, then debt negotiation may be a good option. This will be able to help you slowly recover and avoid going through worst scenarios — like bankruptcy.

On the other hand, if you can make your monthly payments but are looking for ways to save, staying current on your payments may be the better option. While you won’t save enough money, you will avoid damaging your credit score by missing payments or negotiating your debt.

Get Help From The Professionals 

Debt negotiation can positively or negatively affect your credit score, depending on how it is handled. It is important to research and work with a reputable company to ensure that you are getting the best possible terms.

If you need advice on handling creditor negotiations, Alleviate Financial can help. Book an appointment with one of our experts and get guidance on making the right debt management decisions. 


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