Debt relief refers to various methods used to manage or pay back unsecured debt. You may be wondering, can debt relief improve credit scores?
Well, debt relief actions may have an impact on your credit score, however, this is dependent on your method of choice. We’ve got all the information you need on the various debt relief options and how they affect your credit score.
What is a Debt Relief Program?
Simply put, debt relief programs are programs put in place to reduce or manage debt. They aim to make it easier for the borrower to make payments on the debt. The different options for debt relief may require different things from the creditor, such as forgiving a portion of the debt principal amount, reducing interest rates, or debt consolidation.
How Does Debt Relief Work?
Several plans fall under the concept of debt relief. We’ll take a look at some options below.
- Debt consolidation involves consolidating various debts under one loan. This saves you money on interest and can also help streamline your repayment. There are two common ways of consolidating debt. One involves using a personal loan to help pay for all your debts as one. The second one involves the use of a balance transfer credit card which places all your credit card debt onto one credit card.
- Debt settlement involves enlisting an outside company to help negotiate and settle your debt with a specific lender. Debt settlement companies work to decrease your debt. They will most likely require you to stop making any further payments to the creditor while the proceedings are in running. While this may hurt your credit, it’s important to note your credit score has already dropped if this form of debt relief is a viable option.
- Debt management involves seeking the help of a credit counselor to assist you in planning and executing a responsible debt payment plan. A credit counselor will review your situation and discuss it with you. Once this is done they will come up with a plan for managing all your unsecured debt. Your debt management plan will likely outline the amount you are required to pay monthly. This method may also require you to not seek any further credit for some time.
- Bankruptcy may also help get you debt relief. However, this is a last-ditch effort. The process of declaring bankruptcy is a complex and lengthy one that involves attending court and enlisting the help of an attorney. After filing for bankruptcy the court will evaluate your debt and make sure that all the other possible options have been exhausted.
How Does Each Debt Relief Option Affect Your Credit?
Debt relief can affect your credit in both a good and a bad way, this simply depends on the method you choose, as well as how far back you are in debt. You can be knee-deep in debt and still have a good credit score as long as you manage repayment responsibly.
- With debt settlement, you’ll most likely be asked to stop making payments to your creditor while the company does its job. This however is considered a missed payment on your credit history and can spark a drop in credit scores. On the other hand, rebuilding your score will be easier after completing a settlement program
- Debt management is a good option to get debt relief. This is because it does not harm your credit score. With this method, if you simply stick to the repayment plan that your credit counselor designs for you, your credit score will not suffer.
- If you manage debt consolidation responsibly it shouldn’t hurt your credit scores. So, be sure to make all your payments as they are due. This will positively impact payment history, the most important aspect of credit scores.
- Bankruptcy will negatively impact your credit score. Furthermore, it will remain on your credit history for seven to 10 years.
The above pretty much answers the question, “Can debt relief improve credit scores?” We hope you’ve found this information helpful and are well on your way to making the right choice.