How Does Debt Relief Companies Hurt Your Credit?

Wondering how debt relief companies hurt your credit?

When you are struggling with overdue debt, the first solution you think of to handle your mounting debt is eliminating your outstanding balances through debt relief. 

However, debt relief is not the best solution for everyone and can make things worse by hurting your credit scores.

Do your research and understand your options to avoid ending up with a debt relief method that could hurt your credit in the long run.  

In this article, we will be talking about how debt relief companies hurt your credit and how you can manage your payments to keep your credit in check.

How Does Debt Relief Companies Hurt Your Credit?

Key Takeaways

  • Some ways of debt relief can have a long-term impact on your credit score, while others may have a short-term impact.
  • Debt settlement is not only very risky but also impacts your credit score negatively.
  • If you make all your payments on time, then a debt management plan is the best way to deal with your debt that doesn’t impact your credit score.
  • A bankruptcy record remains on the credit score for 7-10 years, making it hard for you to take new loans.

What is Debt Relief?

Debt relief is a set of strategies used to ease and manage the burden of a mounting debt by making it easier to handle.

Debt relief programs typically involve changing the terms or amount of your debt and helping you break free from the financial burden and get back on your feet.

Some of the ways to reduce your debt burden include: 

  • Reduction in the interest rates
  • Changes in the loan payment terms
  • Loan refinancing
  • Reduction in the loan amount owed
  • Consolidation debt
  • Bankruptcy

How Do Debt Relief Companies Affect your Credit? 

Debt relief can have several different forms, and one may work better than the others.

The impact of debt relief on your credit score is determined by the method you choose and how far behind you let your debt fall.

Some ways of debt relief may have a long-term impact on your credit scores, while others have a relatively short-term effect, and your credit scores rebound in a couple of months. 

Before opting for any kind of debt relief plan, take a look at each debt relief method and its impact on your credit score:

Debt Settlement

Debt settlement is one of the riskiest debt relief options that can negatively impact your credit scores.

Debt relief companies usually ask clients to stop making payments to their creditors while settling their debt on their behalf.

As you may all know, payment history is an essential aspect of your credit scores, and even one late payment will severely damage your credit score.

Also, when the creditor closes the account due to a modification in the original credit agreement, your credit scores will automatically take a dip.  

Debt Management 

Though a Debt management plan is considered one of the best ways to handle your debt without hurting your credit scores, your credit scores would remain unaffected as long as you make all your payments on time.

However, some creditors may note that you are enrolled in debt management on your credit report, which has technically zero effect on your credit score.

Still, your future lenders may see it negatively while deciding whether to extend you more credit. 

Debt Consolidation

Debt consolidation can improve or hurt your credit score, like Debt Settlement, based on how you choose to consolidate your debt and how meticulous you are with your repayment plan.

Read Difference Between Debt Settlement And Debt Consolidation.

During debt Consolidation, you need to take out a loan to pay creditors, often through a personal loan or balance transfer credit, to wrap all your debts into one.

Still, it will reduce the average age of all your accounts, and chances are you will suffer a hard inquiry that will ding your overall credit score.

Credit Counseling

Although most credit counseling agencies typically provide free advice.

However, many agencies ask for compensation from lenders to finish the debt management plans that require you to enroll in a debt management plan that may have a direct or indirect impact on your credit.

The credit counseling agency will add a notation on your credit file that you have been enrolled in a debt management plan, negatively impacting your credit score and utilization rate.

Bankruptcy

Bankruptcy is the last option that helps you wipe your debt altogether, but it severely impacts your credit score.

When you declare bankruptcy, you won’t pay your covered debts in full as per the contract.

The bankruptcy remains on your credit reports for 7-10 years, and lenders will be able to see your credit report, and you will have a hard time getting approved for future loans.

So, if you are planning to declare bankruptcy, consider other debt-relief options to see if your debts can be relieved using another method.


Things to Avoid to Save your Credit Score

If you don’t want your credit to be hurt, here are some things you should avoid doing:

  • You are not paying a secured debt (Car installment) on time to pay an unsecured bill such as a credit card or hospital bill).
  • Please don’t take out a loan against your home’s equity, as it may put your house at risk of foreclosure by turning the unsecured debt into secured debt.
  • Don’t think of withdrawing money from your financial savings to repay debt1
  • Think wisely before borrowing money from your retirement savings. If you accidentally lose your job, the loans will become unintentional withdrawals and may trigger a tax bill, which nobody wants.

Avoid making decisions based on what your lenders are saying, and take time to research your options and choose the debt relief method that fits you well and is in your best interest.


Bottom Line

Debt relief can have both positive and negative impacts on your credit score.

The debt relief industry is tricky and full of scammers, and you could end up with even bigger debts.

By finding the right debt relief company, you can easily maintain good credit while having a lot of debt. 

Some debt relief methods may have a long-term impact on your credit scores, while others have a relatively short-term effect, and your credit scores rebound in a couple of months. 

Choose the best Debt relief method that fits well with your financial situation, including your credit scores in the long run.

Always work with a reputable debt relief company, and don’t forget to compare the debt relief programs and their consequences before entering into any agreement.  


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ARTICLE SOURCES

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  1. https://www.experian.com/blogs/ask-experian/is-it-smart-to-use-savings-to-pay-off-debt/[]

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