Part Four – Debt Negotiation and Your Credit

Don’t trust debt negotiators that promise to eliminate your debt for cents on the dollar without affecting your credit score. The harsh reality of debt negotiation is that for the duration of your program your credit score will be extremely negatively impacted. There’s no way to avoid this. However, many people do not realize that there are several components to your FICO credit score and entering a debt negotiation program will affect each part of your credit score in a different way.

a. Payment History (35% of score) – This part of your credit is based on how good you have been at making your regular monthly payments to debtors. If you’ve slipped behind on your payments, this part of your score is already decreasing.

The following factors are taken into account:

i. Payment information on many types of accounts: This will include credit cards, retail accounts, installment loans and mortgage loans,

ii. Public record and collection items – reports of bankruptcies, foreclosures, suits, wage attachments and judgments;

iii. Details on late or missed payments and public record and collection items;

iv. How many accounts show no late payments

If you are still current on all of your payments, this part of your FICO will be immediately impacted by joining a debt negotiation program, because you will need to stop making your monthly payments. Your payment history will likely only begin to improve once you have fully completed your settlement program.

b. Amount Owed (30% of score) – This part of your credit is based on how much debt you owe. Even if you have been a good and timely payer of your debts and have a strong credit history; if you have a ton of debt then this part of your score is decreasing.

The following factors are taken into account:

i. The amount owed all on accounts

ii. The amount owed on all accounts, and on different types of accounts

iii. Whether you are showing a balance on certain types of accounts

iv. How many accounts have balances

v. How much of the total credit line is being used on credit cards and other “revolving credit” accounts.

Once you and negotiators begin paying off creditors, this part of your score will immediately improve.

c. Length of Credit (15% of score) – This is based on how long you have been using credit, both secured and unsecured. The following factors are taken into account:

i. How long your credit accounts have been established

ii. How long specific credit accounts have been established

iii. How long it has been since you used certain accounts

Debt negotiation will not dramatically affect this portion of the score - although over the long-term, these factors will have a gradual effect.

d. New Credit (10% of score) – Credit reporting agencies also take into whether or not you are trying to access new debt. Research shows that opening several credit accounts in a short period of time does represent greater risk, especially for people who do not have an established credit history.

The following factors are taken into account:

i. How many accounts you have

ii. How long it has been since you opened a new account

iii. How many recent requests for credit you have made, as indicated by inquiries to the credit reporting agencies

iv. The length of time since credit report inquiries were made by lenders

v. Whether you have a good recent credit history

Debt negotiation will not affect this component because you will not be able to open to new credit during the course of your program.

e. Type of Credit (secured vs. unsecured) (10% of score) – Your FICO score will also represent the mix of credit that you have, such as unsecured and secured debt. This factor becomes more important when you do not have a significant of other information to score.

The following factors are taken into account:

i. What kinds of credit accounts you have

ii. How many of each

Debt negotiation will not dramatically affect this part of your credit.

You can download a free guide on understanding your FICO score from myfico.com >