I am considering signing up with a debt settlement company. They told me that in order for them to negotiate the best deal with my creditors I must refrain from paying my bills for more than 90 days. Won't this negatively affect my scores?
Yes, not paying your bills for that length of time will seriously impact your credit scores. Even missing just one payment on an account will likely have a negative effect on your scores. Allowing multiple accounts to become 90 days or more past due will cause your scores to suffer substantially.
Credit Counseling Versus Debt Settlement
No reputable credit counseling or debt management company would encourage you to intentionally stop making payments on accounts to leverage a payment plan if you have the financial resources to make the payments.
Though they sound similar, debt management is not necessarily the same as debt settlement. Debt settlement companies typically negotiate a reduced balance with your lenders, usually resulting in the accounts being reported as settled for less than originally agreed. Accounts reported as settled are scored negatively by all scoring models.
As you've discovered, some debt settlement companies also advise you to become delinquent on your accounts first.
If you are truly in a financial crisis and need assistance, seek an accredited credit counseling service that can help you build a budget and establish a debt management plan that works within that budget. If you enter into a debt management plan, make sure all of your payments will go to your creditors and will be made on time.
Less-than-reputable companies sometimes keep your first check as payment for their services instead of sending it to your creditors, adding a delinquency to your credit history.
Many people do not realize that when a debt management service is making payments on their behalf, making sure the payments made by that company are on time is still their responsibility. Any late or missed payments will be reflected in their credit report, even if they were not aware the payments were not made on time.
If you decide to work with a company who will be making payments to your creditors for you, it's a good idea to double check each month to make sure every payment is received on time.
Choosing Debt Management or Debt Settlement
Asking for help is the first step in regaining control of your personal finances. Just be cautious about the help that is offered. If you are asked for payment up front, are told to stop paying all of your debts, or the service does not include budget counseling and personal finance education, consider going to someone else.
Thanks for asking.
Jennifer White, Consumer Education Specialist
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