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 ¹

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. ²

Type of Debt Relief	Effect on Credit
Debt Settlement	Negative effect; stays on your credit report for 7 years.
Debt Management	Neutral or positive; might see a slight decrease if you close old accounts.
Debt Consolidation	Neutral or positive; as long as you make the payments on time.
Credit Counseling	Might affect your credit utilization ratio.
Bankruptcy	Negative affect; stays on your credit report for 7-13 years.

These Things are Ruining Your Credit Score!

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 debt³.
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.

Ways To Fix Your Credit

When To Seek Debt Relief?

Consider opting for debt relief when:

There is no way for you to repay your unsecured debts within the next five years, even after cutting down on your expenses to the best.
The total debt you owe is more than or equal to half of your gross income.

If you think it is possible to repay

Alternatives of Debt Relief

Because debt relief options can damage your credit, you might not want to go down that part, especially if your situation is not too desperate. So here are some alternatives to debt relief that you can consider:

Negotiate on your own: If you do not want a third party to do your work, then you can try negotiating your credit card debt yourself. You can ask your credit card company to lower down the interest charges or to accept a lump sum amount less than what you owe. Or you can also ask them to come up with an alternate payment plan. Your creditors might agree to do this, especially if you have a good credit score or good history with them.
Balance transfer: If the interest on your current credit card is eating away all your money, then you can get a balance transfer to a new credit card with zero percent APR. Many credit card companies offer 0% APR as a promotional offer that can last as long as a year. Using this method, you will be able to save a lot of money on interest. However, you will have to bear the balance transfer fee, and you should only go for this option if you re sure you will be able to repay your debt before the promotional period ends. ⁴

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.

FAQ

Which debt relief option will have the least impact on my credit?

Debt management and debt consolidation are the best and least damaging options for debt relief.

Will I use my credit card after debt relief?

Certain debt relief options allow the use of credit cards, such a balance transfers, and HELOC. You may be able to utilize your credit card even after debt consolidation if your account is in good standing. However, in case of other options, you will be asked not to use your credit cards.

What are some ways to build credit?

Getting a credit card, store credit card, or gas card and paying the bills on time can help you in building your credit score. However, this is a very slippery road, and if you do not have control over your spending using an aa credit card, then you run the risk of getting into debt again. ⁵

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Traci McGee

Traci is a highly experienced debt resolution expert with over 8 years of expertise in helping people become debt-free through various debt relief programs. As a former employee of a well-known debt relief company, she possesses exceptional knowledge and skills to take care of debt-related issues.

When not writing about debt, Traci can be found conducting in-depth research on the latest developments in the industry to ensure that she stays up-to-date with the latest trends and strategies.

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