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Does Debt Forgiveness Hurt My Credit Score?

shutterstock_323048237Having a creditor just forgive a loan outright or to cancel it for partial payment may seem like a godsend to most people. However, that debt forgiveness can have some serious repercussions that the average consumer may not consider.

Your credit score does not automatically rise – Credit scores are affected by a number of factors most notably, on-time payment history, percentage of debt vs credit limit and length of credit life – so the payment of one debt will not necessarily boost your score dramatically unless the forgiveness is an extremely large one. In short, eventually a debt forgiveness will have an effect on one’s credit score but it may take years for a debtor to see the effect.

Settling one account at a time is probably best – When settling past due accounts, time is definitely on your side so, DO make those final payments as soon as possible but make them to a single creditor. In other words, do not string out payments to multiple creditors over a longer period of time. Instead, concentrate on one and get them paid ASAP. The result will be fewer derogatory marks on your credit score in a shorter period of time. One caveat – unfortunately, this process may actually take years to take effect but it behooves you to get the process started.

Fraudulent charges do not count – Even if a debtor’s credit is abysmally bad, they should pay attention to it. Their are numerous scam artists out there looking to take advantage of any misstep on the debtor’s part. By simply paying attention to one’s credit card balances, they can avoid major headaches in the future. In short, it pays to review  credit card balances on a monthly basis and dispute every charge that is not recognizable.

There is another bill to pay – While not specifically related to your credit score, a debt forgiveness is a taxable event. Believe it or not, this fact means that the Internal Revenue Service considers that any forgiven portion of the debt is actually income and expects you to pay tax on it. If you do not, they will place negative comments on your credit report. Do not overlook this fact as it is very difficult rid oneself of an IRS tax lien no matter how unfair or how old it is.

As can be seen, debt forgiveness is a double-edged sword but, in the long run, repayment will still be beneficial to both the financial well-being and the credit score of the debtor – as well as their state of mind!

Learn how BoostMyScore can help boost your credit score by adding positive history to your credit report.  We do this by piggybacking tradelines.  Buying the right tradeline from the right company is crucial to your credit score  and financial success.

Bill Airy

About the Author:

Bill Airy is the CEO and Founder of BoostMyScore. For over 12 years he has helped American consumers get a second chance at a better financial life by helping them to improve their credit score. He regularly publishes helpful content on this Blog to educate others about Credit Scores and best practices when trying to improve them.

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