How Debt Relief Affects Your Credit
Debt relief choices like debt settlement or a debt management plan might be the answer for those overwhelmed by large debt. But you may be wondering if attending one of these events would negatively impact my credit score or not. You should know these things among others.
Credit Rating and Debt Relief Programs
Debt settlement: Regarding debt settlement, a corporation will assist you in paying your creditors less quantities of money for your balances. Should the matter go to a settlement, you must pay the creditor a one-time payment. There are three main ways that debt settlement could adversely affect your credit: Your credit may suffer in a few important ways from debt settlement:
- Your accounts will often be shut by the creditor which shows that you have settled for the account for less than the full balance. This means that when you are negotiating for a loan with other lenders in the future, they see that you did not repay the creditor in full.
- It feels worse when your accounts are closed in settlement as this is likely to affect your credit scores so badly. This is so since it decreases your overall credit limit and at the same time raises your credit utilization rate.
- In the same respect, paying off debts at a lower value than the full amount due is a negative credit entry and can be on the credit report for as long as seven years.
Debt management plans: For debt management plans (DMPs), a credit counselor helps you to find ways and means to reduce the interest rates and the monthly installments. Participating in a DMP impacts your credit in the following ways: Participating in a DMP impacts your credit in the following ways:
- If one signs up for a DMP, it is necessary to freeze all of their credit accounts. This limits the amount of credit available, and since credit utilization is a factor in credit scores, it ends up reducing your score.
- The accounts simply reflect that they have been closed and not that they were paid as agreed, which is a disadvantage when rating your credit.
- However, debt management plans are known to be less credit-damaging as opposed to debt-settling. If all the above is done and the program is completed successfully, the client can begin the process of having his/her credit score restored.
Balancing Credit Risk and Credit Opportunities
Of course, as it has been previously observed, both debt settlement and DMPs are somewhat damaging to your credit score, to one extent or another. In the long run, paying off all the debts will assist one in handling credit responsibly in the long run. Debt can be dealt with or consolidated through a management plan that will reduce the number of calls, get rid of the extraordinarily high interest rates, and assist you in paying what is owed at a rate that you can afford.
To attain the highest level of success, it is advisable to engage your creditors at the time of enrolment to a program and show a positive attitude towards repaying the remaining debts. However, the accounts should remain current going forward and should not deviate from the path if that would lead to a higher risk of accounts receivable write-offs. After that, when debts are paid through the settlement or the DMP, it is also possible to work on the credit repair by minimally using the credit cards, paying off the balances on time, and showing over time that you have learned better ways of taking and handling credit.
In short – while applying for debt relief solutions can have the effect of initially damaging your credit report and score, in the long run, management of debt and getting debt burdens under control works better and prepares one again for responsible credit usage. And that is what future lenders are most concerned about – positive credit behavior.
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