If you have multiple debts, you can get overwhelmed, particularly if you aren’t in a position to clear them all as the loan terms demand. The best option to save the situation is to consider a debt relief loan. But does a debt relief loan hurt your credit? That’s the question we’ll answer, but before we answer it, you need to understand what a debt relief loan means.
Debt relief, just as the name suggests, refers to different ways of easing your debt burned through ways such as debt consolidation, debt settlement, debt negotiation, and even credit counseling.
All these efforts aim at one of the following goals: extending your loan term to reduce your monthly repayments, lowering the rate of interest charged on your loans including credit card loans, or reducing the outstanding principal owed to lenders.
How Debt Relief Affects Your Credit
Whether or not debt relief will affect your credit depends on how far you’ve delayed your payments and the debt relief method you’ve chosen. The fact is, if you let your accounts go beyond the due dates or you miss payments, your credit rating will be affected. You may be having several debts, but if you manage them well, your credit standing will still be impressive. A reputable debt relief expert can help you manage your debts responsibly to keep a high credit score.
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Here are the different ways in which debt relief can affect your credit score:
This is a debt relief option that’s a little dangerous and can easily harm your credit rating. A debt settlement company will ask you to stop payment to your lender as they negotiate for you better deals. Bear in mind that your payment history is a major factor when it comes to determining your credit score. So the moment you stop payments, your credit score will be jeopardized. Debt settlement companies aren’t concerned about your credit rating. They aim to eliminate or lower the amount you owe. For this reason, make sure you deal with an accredited debt relief provider, so your deal doesn’t fail.
Also, consider how missing payments will impact your credit history and any tax consequences. Debt settlement should be your last option if other debt solutions fail to work.
If you are entangled in lots of debts that you find difficult to handle, then debt management would be your best option. Debt management won’t hurt your credit score in any way because it’s just a matter of creating a repayment plan that works best for you. And you don’t have to do it on your own. You can hire a credit counselor to deal with the lenders on your behalf.
Once the credit counselor has created a payment plan for you, it’s better to stick to it and be honest to honor it. Don’t miss any payments and delay your payments.
Debt consolidation is a way of combining all your debts into one debt. This debt relief method won’t hurt your credit score if managed well. When you succeed in consolidating your debts, there are high chances the new lender will check your credit when appraising your application. This will result in a “hard inquiry”, which can hurt your credit rating but only for a short duration. Before you go for a debt consolidation loan, make sure you always make your payments in time to have a good credit score. Also, don’t apply for any new credit cards.
Bankruptcy is a way of getting debt relief, but it will greatly hurt your credit score. When you apply for bankruptcy and succeed, it will be part of your credit history for a decade. It will make it really hard for you to get any loans in the future. So before you consider getting declared bankrupt, try other options at your disposal.
Back to the question, does a debt relief loan hurt your credit? As you can see from our discussion, debt relief is both good and bad. It all depends on how you play your cards. Let a financial expert help you make an informed decision.
By Taylor Wilman