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Debt Settlement Companies Hurting Credit Score

By Sally Maison
Published: Thursday, December 10th, 2009

With debt among the major problems of Americans today, it is no wonder why many people feel desperate to get out of it. Because of it, many are easily lured by the promise of debt settlement companies to get them out of their debts quickly. But these people do not know that a debt settlement could hurt their credit score. Additionally, people who go to debt settlement firms create a negative impression among creditors.

Debt Settlement Companies Hurting Credit ScoreDespite its negative effect, Georgians still continue to work with debt settlement firms. Why? During a twelve-month period which started September last year, Georgia ranks third in the whole United States in terms of bankruptcy rates, with 7.52 filings for every population of 1,000. The report by the Administrative Office of the United States Court shows that Georgia follows Nevada and Tennessee closely.

Consumer Credit Counseling Service of Atlanta, a non-profit agency, notes that people who seek debt management help average between $18,000 and $20,000 in debt. Analysts say the commercial for settlement firms are doing them wonders, that is why they are able to lure many people. Unfortunately, there are things those companies do not reveal that could be harmful to consumers.

Experts say debt settlement firms require high upfront fees that, most of the time, do not lead consumers anywhere. For instance, an agent may promise to reduce a $10,000 debt to $5,000 but only after a client pays them $1,000. Experts comment that the amount could have been used to pay the debt partially instead of giving it to people who give dubious promises.

Moreover, debt settlement companies hurt a credit score because they often advise a person to hold payments while they are still negotiating with creditors. This only leads to an increase in unpaid bills and delinquencies. Last week, Fair Isaac and Company, the company which developed the most widely used credit score model, reminded consumers last week that late payments are among the top damaging marks to a credit score.
Specialists also warn consumers about the dangers of being sued, which would lead to additional costs. They explained that cardholders who are going through a settlement are not immune from a lawsuit.

Experts likewise tell consumers that a settlement mark on their credit report could hurt their score, while losses could be greater for those who have higher ratings. For instance, a person who has a credit rating of 680 may see his score drop by 45 to 65 points. A person whose credit score is 780 could see his drop by as much as 125 points.

According to specialists, the best way to settle a debt is by personally dealing with creditors.

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