Dear Driving for Dollars,
I’ve been having trouble making my payments on my car loan, and my bank has offered me a settlement plan. If I take that offer, will it damage my credit?
— Cynthia
Dear Cynthia,
Yes, settling car loan debt lowers your credit scores, though it will typically cause your score to drop fewer points than a car repossession would. Remember that your credit score already may have dropped due to late or missed payments, and it will continue to decline the longer you have financial trouble. So agreeing to the settlement and then taking measures to restore your credit may be your best choice.
One important thing to note is when all or part of a debt is forgiven, that amount is usually considered taxable income, so you may find that you’ll pay higher taxes as a result.
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