Debt Relief – How Does Debt Relief Affect Your Credit Report and Credit Scores?

Debt relief can help people weighed down by credit card and loan balances find light at the end of the tunnel. Debt relief options can include reducing debt, consolidating credit and even finding ways to forgive debts. Understanding all of your debt relief options and how they work is key to choosing the best solution for you.

High inflation and rising interest rates have many Americans relying on credit cards and loans to keep up with expenses. This has led to record high balances on credit cards and unsecured loans, according to TransUnion. If you are unable to make your monthly debt payments or feel like it is impossible, you may be considering debt relief. But before you do, consider the pros and cons of each type of debt relief program or option.

Debt Relief and Credit Scores

Some types of debt relief programs can have negative impacts on your credit reports and credit scores. The exact impact depends on the debt relief program you choose and how far behind you were in your payments when you started it. For example, if you sign up for a debt settlement program, it’s important to understand that you will likely have to be at least several months behind in your payments before the company can negotiate with creditors to pay off what you owe. This can have a significant impact on your credit scores and your ability to get new credit in the future.

If you are considering a debt settlement program, it’s also important to know that the company will charge fees. These typically include a fee to establish an account with the debt negotiator, plus monthly service fees and a final fee of a percentage of what they have negotiated you out of owed debts. Many of these fees aren’t negotiable, and they will add up over time.

Other forms of debt relief can also negatively affect your credit report and credit scores, such as debt forgiveness from nonprofit organizations. These are typically available through local government agencies, and can be a good way to reduce your debt without having to have the negative impact on your credit that comes with a bankruptcy.

Other forms of debt relief can involve reducing your interest rate or extending the length of the loan. These can be beneficial for those with a steady income who need help managing their debt and finances. This can allow them to continue making their current payments and still have enough room in their budget to pay off their debts. Before considering these types of options, it is important to speak with a credit counselor or other financial professional to see what your best options are for debt relief. These professionals can help you develop a plan that will save money and give you the best chance of succeeding in your debt repayment. They can also provide advice on budgeting and ways to increase your income so that you have more wiggle room in your budget for other obligations, such as housing and utilities.