When you are enrolled in a debt settlement program , you need to brace yourself for the negative effects on your credit score. To understand that, let us discuss two things.

First is what credit score is all about. This is a figure that people use to determine your financial capabilities and behavior. There are three major credit bureaus that consolidates every consumer's credit report. This report is used to calculate your score. That score is calculated by using a special formula that looks at 5 different aspects of your financial life.

The first is your payment history which is 35% of the whole score. The second comprises 30% and it is the total amount of debts that you have. The third is your credit history and it is 15% of the score. The last two each hold 10% of the credit score and they are new credit accounts and the types of credit being used.

To know how your credit score is affected, let us proceed to discuss what debt settlement is. This type of debt relief aims to reduce your outstanding balance by negotiating with creditors. To get them to agree to this reduction, the debtor must prove that they are in a financial crisis. One of the things that will prove this is by deliberately defaulting on your monthly payments. If you do not do this, the creditor will not believe that you have a problem with your finances.

That act will cause some serious damage to your credit score because any late payments will be reflected on your payment history. As mentioned earlier, this constitutes to 35 percent of the overall credit score. This will also cause your debts to increase because of the late penalty charges and other fees. That will affect the total debt amount that is 30% of your credit score.

With all these, you can estimate that entering into a debt settlement program will cause you to lose up to 160 points. That actually depends on your current score. While the exact details are not sure, a person with a score of 670 may lose up to 65 points only. But someone with a score of more than 750 may lose up to 160 points. This is based on the FICO formula that is most used in the industry.

The good thing about this is it is only temporary. As soon as you finish your debt settlement program (which is between 2-4 years), you can start rebuilding your credit score. There is a mark on your report that will indicate that your debts were "settled" and that is something negative - but not as damaging as a bankruptcy taint.