Will Debt Relief Hurt My Credit Score?

by Pathlie Lee Business consultant

When you’re struggling to pay off a high amount of debt, taking up a good debt relief program can be a solid way to regain your financial independence in the long run. This works especially well with loans that require no collateral.

But you can reduce your debt by negotiating a settlement between you and your creditors.

If that feels like an uphill task, you can work with a debt consolidation company you trust. Both of you can then strategize a debt repayment plan that works for you and encourages you to follow through with it.

A typical debt relief program runs for about 2-5 years, depending on the amount you owe or your ability to make payments.

In most cases, legitimate companies will successfully help you reduce your debt. Many people worry that it could hurt their credit score, though.

But will debt relief damage your credit score?

Here’s the whole story.

How do debt relief programs affect your credit score?

Every American adult has a credit score.

It measures the likelihood that you’ll pay back what you owe, as agreed.

In a way, it’s a virtual snapshot of your financial habits and it fluctuates depending on how prudent you are with your money.

It’s necessary so that consumers can get into the habit of paying their bills on time, and reduce the amounts they owe. And reduce their financial dependence to ensure true independence.

When calculating your credit score, they look at several indicators, including the following:

● Payment history: Shows how you’ve paid your bills in the past

● Debt level: Also known as Credit Utilization. This is the ratio of your outstanding credit card balances to the maximum amount you’re allowed to draw. It’s used to measure the amount of credit that’s available for you. For instance, if your credit limit is $5000 and you’ve only drawn $2000 then you have a 40% credit utilization. It’s better if you keep it low.

● The length of credit history, including the type of credit used.

● Inquiries or number of times you’ve attempted to apply for credit

When debt accumulates, it means you haven’t been able to keep up with the regular payments as you’d initially agreed with your creditor.

That’s where a personalized debt management plan comes in handy.

It makes you more accountable by working out how you can sustainably make timely, automated monthly repayments.

These companies also have credit counselors whose job is to help you build a habit of paying your expenses on time.

Naturally, this creates a positive effect on your credit score.

When you’re in debt, it makes you desperate. You might be tempted to run multiple accounts, and end up becoming a burden to you. And you don’t want that.

A good debt relief plan may actually help

A debt relief program will help you avoid that by focusing your repayments where it matters. Your professional credit counselor negotiates a new payment window with your creditors so you can enjoy more peace of mind.

You might be penalized for late payments, but this is temporary.

With debt management help, your credit score will get better when you start making regular and timely payments through six months.

Working with debt relief programs is a step in the right direction. It shows that you took responsibility and did as much as you could to settle your debts.

This way, your credit history is not damaged. You’ll be able to begin rebuilding your credit score after you’ve paid off your debt.

Ultimately, it’ll just be a blip in your credit history, that helped lower your debt, get creditors off your back, and enjoy peace of mind with true financial independence.