Debt Settlement Causes Credit Scores To Jump 74-130 Points!
First an example of two clients:
James and Anne of Laguna Hills, California, who cut their $55,000.00+ of credit card debt down to just $29,817 (including fees) through debt settlement. Only 18 months after starting their debt settlement program, they were debt free with over $2,100.00 a month in CASH FLOW back in their pockets!
Perhaps even more liberating was checking their credit scores shortly after graduation. James saw his credit score jumped 74 points while Anne’s score jumped 130!!
Can You Imagine…
Going from a 520 score just before starting her debt settlement program to a 650 immediately after graduating?
How could this be?
Let’s take a look…
How Credit Works
Understanding “how credit works” seems to elude most people. I think creditors and banking institutions have purposely made it difficult for the average person. It is very complex.
There are three main factors that make up your credit score:
- Payment History
- Debt-to-Income Ratio
- Debt-to-Credit Limit Ratio
Each of these factors make up about 33.3% of your credit score, and any of them can ruin it.
The Truth About Payment History
Payment history is exactly what it sounds like: the record of timely, regular payments of at least the minimum due.
If you have a perfect payment history, you have something to lose in this area of your credit. With the very first late payment, your credit score drops dramatically. Each additional late payment has less negative impact.
So if you have at least one late payment on your credit report (you’ve fallen more than 30 days behind in recent times), you’ve already taken the major hit to your payment history.
Debt settlement, while causing additional late payments, will not have nearly as severe of an affect on your credit score as it would if you have never missed a payment and maintained a perfect payment history.
Debt-To-Income Ratio – If this area is weak, it can ruin your credit worthiness.
This is how much debt service you pay (what you’re obligated to pay towards debt) each month verses your net monthly income. How do you get this number?
Add up all payments you must make each month, including credit cards , medical bills, student loans, mortgage, auto loans, etc. Divide the total amount into your NET (after tax/take home) income.
You want to keep this ratio at or below about one-third (35%), otherwise it becomes a negative factor that hurts your credit score and worthiness. If your debt-to-income ratio is over half (50%), then you’re CRIPPLED and regardless of your credit score you will have great difficulty obtaining any financing for major purchases.
NOTE: In the past year because of troubles in the mortgage industry, underwriting guidelines have tightened, bringing down the maximum debt-to-credit ratio to 45% in most cases.
Through debt settlement, you eliminate your unsecured debt ALONG WITH the monthly payment obligations you have, thus improving your debt-to-income ratio.
Take your minimum payments on unsecured debt and subtract them from your debt-to-income ratio to see how big an improvement debt settlement will have.
The Least Known (But Just As important) Factor: Debt-To-Credit-Limit Ratio
The third lactor is your debt-to-credit-limit ratio or “utilization.” This is how much your current balances are compared to your credit limits.
The way this works is very interesting. This is probably the least known factor that affects your credit.
Basically, each account you have has a credit limit and a current balance. If that current balance is less than 50% of your credit limit, that’s a positive factor.
Now, if you have an account that’s over 50% utilized, that hurts your credit, becoming more severely negative if it gets over 75% of the limit. If your balance gets to the limit, or over the limit, it becomes a crippling factor.
Again, you can have a perfect payment history, always making your payments on time or early, but if you’ve got a maxed-out or over the limit account you’re stuck.
Through debt settlement your account balances are paid to a zero balance, wiping out any over-utilization and improving this area of your credit.
So How Will Debt Settlement Affect Your Credit Score?
To make it simple for yourself, look at each of these three areas… And determine which are strong and which are weak for you at this time.
No one can say exactly how debt settlement will affect your credit score, but after working with thousands of people for over seven years, here’s how I see it:
If all three areas are strong , your credit will take a hit. The question then becomes which is more important: keeping good credit or being debt free? Credit or cash flow?
It’s up to you.
If you have a perfect payment history and 700+ credit score, and keeping your credit is more important than eliminating your debt and freeing up your monthly cash flow ASAP, avoid debt settlement.
However, if you have one or more weak areas, remember that overall, debt settlement will only hurt your payment history. It doesn’t hurt it much if you’ve already fallen behind in the past, but debt settlement also IMPROVES the second and third areas, optimizing your ratios.
The worse these factors are for you going into debt settlement, the greater debt settlement will improve your credit, especially for the long term.
Credit is indeed important, but remember: Cash is KING! Cash flow RULES!
Keep in mind the “BIG IDEA”: STOP paying interest and START EARNING interest, ASAP!
This is critically important if you ever want to retire, and makes all the difference between a life of wealth or a life of slavery to interest (seriously).