How Will a Credit Card Settlement Affect Your Credit?

Take note that a credit card settlement is commonly done when you are delinquent in your monthly payments. Therefore, a settlement on your credit card debt will greatly affect your credit standing.

As you may already know, missing payments on your credit card will result to a reduction from your credit score. The longer you are missing your payments, the more your credit score is affected.

Before you consider doing a settlement on your credit card debt, it is imperative that you understand how the three credit bureaus score your credit.

How FICO Make the Score?

Credit Card Settlement - Effects to CreditYour credit score is determined through the reports filed with the three credit bureaus that include Experian, Transunion, and Equifax. These three credit bureaus are the ones responsible in grading your credit-worthiness based on the reports provided by your creditors, which is used for your credit card settlement.

So, make sure that when you consider a credit card settlement, the settlement is reported properly in order not to gravely affect your credit score. Otherwise, you will have difficulty in repairing your credit score.

FICO or Fair, Isaac and Company created the pattern for computing credit scores, which the three credit bureaus follow. However, the three bureaus have their own little variations that result to differences in their scoring. The model FICO provided have the following break down for scoring:

  • Your payment history gets thirty five percent. It is the highest percentage among the factors. Therefore, a little change in it will greatly affect your score. This is why a missed payment can quickly lower your credit score.
  • The amount you owe gets thirty percent, which is the second highest percentage. Therefore, the more you owe, the higher your risk will be.
  • The length of credit history is fifteen percent. Credits have different payment period and the longer the period, the more interest that you pay.
  • The types of credit you obtain get ten percent. Numerous types of credits are available on the market for your taking.
  • Lastly, new credit gets ten percent similar with types of credit. Oftentimes, it is better for you to hang on to older credits than opening new ones often.

How Credit Card Settlement Works?

The concept of a credit card settlement is to adopt a particular process whereby the total amount of your credit card debt is reduced to help you get rid of your debts.

If you will consider this method, you must remember that following all instructions properly in implementing the relief program may eliminate your debt up to fifty percent.

There are few programs that are designed in favor of credit card owners, which compose of several sets of instructions to be followed through the letter.

You will need to calculate the total amount of your debt and determine if you are eligible for the program. If you are eligible for any of the programs, you need to make a proposal on how you will settle the account.

The creditor will review your proposal and determine if you will be able to make the payments. Once you are able to establish you financial stability, you can achieve a good reduction.

Your credit rating will also be considered by the creditor. If in case your rating is low, you make seek the help of credit settlement firms in adjusting your report to get better reductions.

The creditor will then evaluate all available date and determine how much will be waived on your credit card debt.