Debts are inevitable if you are not responsible enough to take care of the repayments. Be it with credit cards or with any other financial aid, you ought to return the amount regularly. This can happen due to irresponsibility and not just a huge debt but you also end up getting your Credit score taken a blow because of the same.

People, when the debt is overwhelming and is unable to pay for it at all, choose to go for “Debt Settlement”. This statement sometimes is confused with loan closure or debt closure, however, these two are different words. Loan or Debt Closure means closing the debt with the whole lump sum getting returned safely. But Debt Settlement means the debt has been settled by the bank.

How Debt Settlement Affects Your Credit Score Post Blog

What is Debt Settlement?

Debt Settlement or Loan Settlement are words that can be used as synonyms. Debt Settlement means that the bank and the borrower came to a conclusion to lower the amount of the loan and the borrower has paid a portion of the loan and then settled the loan.

In simpler terms, the bank and the borrower made a settlement because the borrower is unable to repay the whole loan and the bank has lost any hope of recovery. This settlement is made for a particular portion of the loan which will be paid by the borrower to the bank for the bank to close the loan and not to further persist the borrower for recovery. This is called “Debt Settlement” where the debt is settled not repaid in full or closed.

What are the impacts of “Debt Settlement” on your Credit Score?

Credit Scores are determined by your credit report. A credit report is the report card of your financial life. Which has every detail of your finances and your behavior towards your transactions and everything. From your Credit history to any repayment not made on time or anything else such as bad debt or delinquent amount which you were unable to pay to the bank or your lender.

The Credit Report somewhat determined your Credit Score. Higher delinquent or late payments can cause your Credit Score to fall into greater depths.  A single late payment, no payment, or any other type of delinquency remains in your credit report for 7 years at least. The same goes for the debt settlement status.

When you have paid the whole amount of the loan or debt, the status becomes closed such as “Loan Closure” or “Debt Closure”. With this statement, your credit score gets higher because you have been responsible for paying off the debt and repaying it fully.

So, since the status of a loan is “settled” rather than “closed” and the same will remain on the file for 7 years, the borrower might not be able to qualify for further financial aid. For example – A borrower with “debt settled” status on their credit report applies for a loan with any other financial institute or lender, they might get wary of the capability of the borrower to repay the whole loan. There also will be more possibilities of rejection than that approval of the loan.

How can a borrower deal with this situation?

In these cases, borrower thinks that loan write-off or debt settlements are the best measure they have which is wrong. Once it is recorded on the file, not only your credit score but your financial capability will also fall with the same and it will go on for 7 years.

Here the best one can do is to try and make the payments they can make first and ask for a longer time to make the payment. In case, you have any savings or investments, you can liquidate those as well to pay off the outstanding loan.

The Debt Settlement should be a last resort. But before thinking about that, it is important to try your best to make the payments and pay off the debt. You can also try to re-evaluate the monthly installment structure and reduce the interest rate with the help of the lender.

Also Read: How To Settle a Credit Card Debt – Pros and Cons


Debt is a word that can cause a person much more harm than expected. Not only financial but mental and physical distress can be caused due to the issues regarding debt. Debt Settlement should be the last resort of a person who is unable to make the payments for themselves.

Debt Settlement might get you relaxed but it is not necessarily a good thing for your financial health. There can still be ways where you can still keep your Credit Report clear of the “Debt Settlement” status. It is important to use any significant way to repay the debt you own before opting for the settlement as it does not have a good impact on your creditworthiness.

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