If you’re one of the many Americans struggling with debt, know that you’re not alone. With millions of people facing the overwhelming burden of debt, it can seem daunting trying to tackle it without help. The good news is that there are various debt relief strategies available to get you back on your feet.
Debt management programs are designed to help you control and manage your debt, but some will affect your credit score. Have you asked yourself “How will a debt relief program affect my credit?” If so, you’ve come to the right place. Stick around for everything you need to know.
What’s a Debt Management Program?
There are various debt relief strategies available to help people manage their debt. Depending on what you’re looking for, you may be able to score lower interest rates or wipe out some of your debt altogether.
While this may be music to your ears, it’s important to consider how these programs affect your credit score. While some may help improve your overall score, other programs may hurt it.
How Do Debt Relief Strategies Affect Credit Scores?
So, will a debt relief program hurt your credit score? It depends.
Depending on the type of program you go for, your credit score may or may not be affected.
Check out the following debt relief strategies below to see how they affect credit scores:
- Debt settlement: While the idea of settling some of your debt may seem great, it is generally considered to be a slightly dangerous solution. This is because some debt relief companies recommend you stop contact and payments with creditors you owe money to. Every time you miss a payment, this in turn affects your credit score. As the overall goal of a debt settlement company is to eradicate your debt, this is their chief focus. Credit scores aren’t always as important in their eyes as eliminating your debt. It’s recommended to do your research before pursuing debt settlement.
- Debt management: Debt management involves you or your credit counselor formulating a repayment plan with your creditors. Since you’re not missing any payments with this strategy, it’s generally regarded as safe and not likely to affect your credit score as long as you make payments on time.
- Bankruptcy: While bankruptcy can seemingly solve all of your financial woes all at once, it goes without saying that this debt relief strategy has serious impacts on your credit score. That’s why bankruptcy is seen as a last resort after trying other strategies. Bankruptcy will remain on your credit report for up to 10 years, so think carefully before going down this route.
How to Improve Your Credit Score While Paying Off Debt
Just because you’re paying off debt doesn’t mean you have to live with a bad credit score forever. Paying your bills on time is one of the most important things involved in producing a solid credit rating. This is why it’s so important to make your payments on time. Late or missed payments can have significant impacts on your credit score.
While you may think that having no credit at all can improve your credit score, having established lines of credit can actually help you in the long run. It’s expected for people to owe money on mortgages, credit cards and student loans – by having these lines of credit available with a healthy payment history, you can steadily improve your credit.
It’s also important to lay low when it comes to opening new accounts. Each time you open a new account, a hard inquiry may be done where your credit score is investigated. This is why it’s best to limit the number of new accounts you open if you’re looking to improve your overall score.
How Will a Debt Management Program Affect my Credit?
There are multiple ways to get out of debt – but it’s important to do your research and find out how various debt relief programs affect your credit.