What are the pros and cons of credit card debt forgiveness? (2024)

FAQs

Is credit card debt forgiveness bad for your credit? ›

Credit card debt forgiveness can cause your credit score to drop substantially. Most credit card debt forgiveness solutions tell you not to make payments on your credit cards. Instead, you'll allocate the money you would normally make payments with to saving for a settlement.

While debt relief can help you get out from under crushing debt, there are some potential drawbacks to be aware of. Credit score decrease: Debt relief services require you to stop paying your creditors while they negotiate a plan with them. This can hurt your credit score (although not as much as bankruptcy).

Downsides of debt forgiveness

The forgiven debt may show up as settled accounts on the credit report, which means the lender accepted less than the full payment for the loan. A debt settlement also causes your credit score to be lowered for years before and after because of the missed payments and settlement.

Debt Settlement Impact on Credit Score

While not as devastating as a bankruptcy, debt settlement will have a negative impact on your credit score if you work directly with your creditors, as the settlement may be reported by the creditor to each of the three leading credit bureaus.

An account that was settled remains on your credit report with a status of “settled.” This entry will appear for seven years from the date the account first went delinquent. Like with declaring bankruptcy, this could potentially make it challenging to get approved for obtaining credit for some time.

As long as your loans were in good standing at the time they were discharged and your accounts are being reported properly to the credit reporting bureaus, you won't see a huge difference in your score. On the other hand, you could see your score drop if your account wasn't in good standing prior to the discharge.

Debt settlement programs and bankruptcy both have the potential to result in forgiven debt, but they're also likely to have a significant impact on your credit score and your ability to borrow.

Key Takeaways. Debt settlement can eliminate outstanding obligations, but it can negatively impact your credit score. Stronger credit scores may be more significantly impacted by a debt settlement. The best type of debt to settle is a single large obligation that is one to three years past due.

In particular, the tendency to express forgiveness may lead offenders to feel free to offend again by removing unwanted consequences for their behavior (e.g., anger, criticism, rejection, loneliness) that would otherwise discourage reoffending.

Who has the best debt relief program? ›

Borrowers with only undergraduate debt would qualify for forgiveness if they first entered repayment 20 years ago (on or before July 1, 2005), and borrowers with any graduate school debt would qualify if they first entered repayment 25 or more years ago (on or before July 1, 2000).

If you're one of the millions of Americans struggling to repay high-interest debt, a debt relief plan may be an option to help you get your finances on track. But it's not a quick fix. It's a long-term solution designed to help you get out of debt over a period of time — typically several years.

Debt relief service scams target consumers with significant credit card debt by falsely promising to negotiate with their creditors to settle or otherwise reduce consumers' repayment obligations.

Outside of bankruptcy or debt settlement, there are really no other ways to completely wipe away credit card debt without paying. Making minimum payments and slowly chipping away at the balance is the norm for most people in debt, and that may be the best option in many situations.

"Debt relief can help you lower your outstanding debt, thereby increasing the amount of credit you have available," explains Noah Damsky, CFA, principal at Marina Wealth Advisors, a financial planning firm. "This can lower your credit utilization ratio, which can improve your credit score."

A DRO will impact your credit record for a period of six years. This is because your credit report looks back over the past six years of your borrowing history. A DRO will therefore impact future credit applications. When you apply for credit, companies look at your credit information to decide whether to lend to you.

The bottom line. While settling your credit card debt may initially have a negative impact on your credit score, it can ultimately prove to be a stepping stone toward regaining financial stability and improving your creditworthiness in the long run.

Cancellation through federal student loan forgiveness or credit insurance could have a slight impact on your credit score through paying off the loan and closing the account. However, if you obtained forgiveness due to bankruptcy, debt settlement or a charge-off, you can expect your credit to take a significant hit.