A number of consumers are turning to debt settlement in order to find help with their personal finances.
However, a recent report from USA Today’s Sandra Block notes that debt settlement could also affect a consumer’s credit score. Debt settlement firms work by offering to negotiate with creditors to cut down what a consumer owes.
Block noted that some debt settlement companies may tell consumers to stop paying their debts to their creditors, which could hurt a person’s credit score.
“Even if the settlement firm negotiates a lower debt, late payments will stay on the borrower’s credit report,” Block said. “In addition, the borrower’s credit report will reflect that the amount was settled, not paid in full.”
One alternative cited by Block is for consumers to go to a credit counseling service. Credit counseling firms can offer consumers a debt management plan, which will help them pay off their debts without actually lowering the amount they owe.
If the credit counseling agency makes the payments in time, the debt management plan won’t affect a consumer’s credit score.
It would appear as though some consumers are getting a better handle on their debt problems. According to the Federal Reserve, the amount of household debt fell by 1.75 percent during the second quarter of this year.