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Debt Settlement, a Credit Report Blemish

By Faye Mergel
Published: Friday, September 25th, 2009

The debt settlement industry in the United States is on a steady rise for the last few years. This is simply because more and more Americans are willing to go into settlements instead of paying off their debts in full. This frees many consumers from debt, but it is a negative mark they will have in their credit report.

Debt Settlement, a Credit Report BlemishBased on the latest census by the Federal Reserve Board, the total debt of American consumers nears 2.6 trillion dollars. That translates to every United States citizen owing about 8,500 dollars. That is, of course, if we include children and other people who do not own a single cent. In reality, many consumers owe more than that. An average card holder owes 12,500 dollars to the banks. This does not include other debts in mortgage and auto loans. With a load this heavy, many consumers seek help from debt settlement companies.

Settling a debt is negotiating with lenders on adjusting a term. A consumer, with the aid of negotiators, will ask lenders to decrease interest rates or reduce the remaining balance. Consumers think that this sets them totally free, but lenders have the credit reporting agencies (CRAs) and other lenders to back them up.

It is the job of creditors to keep the CRAs on track of a person’s debt management. When a creditor agrees for a settlement, he does not report to the CRA that a consumer has paid in full. Instead, he will leave a “debt settled” mark on the credit report. With remarks like this, a consumer will find it more difficult to apply for new loans. This is because lenders do not want to give credit to people who choose to negotiate instead of paying the actual balance that they owe.

Statistics, however, reveal that more companies, especially card issuers, are now willing to go into settlements rather than receive files for bankruptcy. Naturally, they would rather have a few dollars back than none. Card companies now offer interest rates as low as four percent if a person promises to close his account and pay off all the balances in a specific period (this can range from a year to 60 months, depending on the amount owed).

The recession forced both parties to be more compromising. Creditors accept what they can get while consumers, for their part, are willing to get their credit reports tarnished just to get rid of their debt loads. However, experts advise consumer that they should pay if they still can. They add that a good credit report is an investment which is much needed in a fluctuating economy.

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