How does debt relief affect my credit?
I have accumulated a lot of credit card debt in the past few years. I need to do something, to change course to solve this problem. I haven’t decided what to do. An important part of my decision is how does debt relief affect my credit?
Thank you for your question about how debt relief affects your credit.
It is great that you decided that it is time to make a change and work on getting out of debt. Your debt problem is not going to solve itself, but if you have the will to tackle it, there are options available.
Your question indicates that you understand that there is more involved in getting out debt than how large your payment is each month and how many months you need to make it. Choose a debt relief option that you can afford, but weigh other factors, too.
Credit Score is Important
It is smart to be concerned about your credit score, for a number of reasons. Your credit score is used by lenders to determine if you are eligible for an auto, home, or personal loan. It is also used by other creditors like credit card companies, retail stores, and other credit issuers whether to grant you credit. Your credit score can also be used by landlords to determine if they will rent to you, and by cellphone or utility companies to decide if you have to make a security deposit in order to open an account.
We all would want to have good credit instead of bad, if given the choice, all other things being equal. But when you have a lot of credit card debt, all other things are not equal. If you place a higher value on getting out of debt than you do on credit impact, some options may be more appealing to you than others.
To make an intelligent, informed decision about the effect of debt relief on your credit, you need to know your current score. Your current credit score:
- Determines the debt relief solutions available to you.
- Influences strongly the importance you assign to how debt relief affects your credit.
What's Your Credit Score?
Knowing your current credit score is crucial for you to accurately weigh the impact debt relief options will have on your score. Get a free credit report here, paying only if you keep the service past the free trial period.
Debt Relief Options
There are a limited number of ways to get out of debt. Solutions include cutting expenses, paying your debt off more efficiently, transferring your balances to a lower interest card, getting a debt consolidation loan, using equity in your home to pay off your debt, using a consumer credit counseling service, negotiating principal balances in debt settlement, and filing bankruptcy.
Some of these options are only available to you if you have strong credit. If you have poor credit today, then a debt consolidation loan or refinancing to pay off your debt are not options.
Each of these different debt relief solutions affect your credit score differently. Some improve your credit and some harm it.
Please review the table below for a quick understanding of the credit requirements and credit impact for each debt relief option.
|Debt Relief Options||Credit Requirements||Credit Impact|
|DIY||None||Improves your credit if you pay down your balances, doesn't improve your credit if your credit utilization remains high.|
|Balance Transfer||Excellent credit||Small hit to credit if you open a new card to make transfer. Improves your credit over the mid and long-term if you don't run up balances on the cards you paid off and you bring down the balance on the card to which you transferred the debt.|
|Personal Loan||Good credit or better. Stronger scores will receive lower rates.||Small hit to score for hard inquiry lender requires. Builds credit score if you pay the loan as agreed.|
|Cash-out Refinance||Fair credit or better (the higher the score, the more more mortgage programs available and the better the rates)||Small hit to score for hard inquiry lender requires. Builds credit score if you pay the loan as agreed. Raises score by lowering credit utilization if debt doesn't accumulate on cards you pay off.|
|Credit Counseling||None||No effect on credit score from notation that your accounts are in a DMP. Notation can effect eligibility and lelad to higher rates from creditors/lenders.|
|Debt Settlement||None||Credit score drops significantly due to delinquencies on accounts prior to settlement. Long-term improves scores as debts are paid off, if new debt is not run up. History of delinquencies remain on credit report for 7 years.|
|Bankrutpcy||None||Big hit to scores. Notation remains on credit report for up to 10 years. Independent of score, presence of BK prevents some loan programs for a number of years..|
Making the Right Choice About Debt Relief and Credit
Faced with your situation, there is no single answer that is right for everyone. What is most important is that you make a thoughtful decision, based on an accurate understanding of your choices regarding debt relief and your credit score.
It makes sense to evaluate each debt relief option you are considering for the size of the required monthly payment, total cost to get out of debt, and impact on credit. The answer to any one of those factors could lead you to choose a specific program. For instance, if you need a reduction in the size of your monthly payment, you may look at a credit counseling program and debt settlement. The credit impact of debt settlement is greater, but so is the reduction in monthly payment, on average.
Take time to consider what is most important to you. Be realistic about what you can accomplish and aware of where you are today. If your credit is already damaged, then a further hit to your score may not any effect on your ability to get financing. The stronger your credit, the more options you may have and the more reasonable it is to look for a way out of debt that doesn't harm your score.
Only you can decide what is right for you.
Making the Right Choice
Use the Bills.com Debt Navigator to find the right way for you to get out of debt. Our free tool helps you decide, based on answers you give to a series of questions about your individual financial situation.
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q3 2023 was $17.291 trillion. Auto loan debt was $1.595 trillion and credit card was $1.079 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Collection and delinquency rates vary by state. For example, in Michigan, 17% have student loan debt. Of those holding student loan debt, 9% are in default. Auto/retail loan delinquency rate is 4%.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.