Can Debt Relief Hurt or Help Your Credit Score?

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When you imagine yourself relieved of debt, it’s a purely positive feeling. Unfortunately, debt relief in some of its forms can carry with it some pretty negative consequences. That said, any one of these options could be the best option, depending on the circumstances.

How Debt Relief Options Affect Your Credit

There are five ways you can relieve yourself of debt:

  1. Pay Off Your Balances. Granted, this is easier said than done, but it will certainly relieve you of the debt that is costing you money in the form of interest payments and, likely, a big headache in terms of the stress associated with outstanding debt that never seems to go away. If you keep all of your paid-off credit card accounts open after paying them in full, this should have only a positive impact on your credit. Not only will your accounts be reflected as current, but you will improve your credit utilization rate. On the flip side, closing your credit cards will have the opposite effect, hurting your credit utilization rate. The key is keeping as many of your accounts as possible, but at zero balances.
  2. Consolidate Your Debt. By using this option, you pay off your balances, but with the help of a loan, through which you consolidate your debt into one account (i.e., use the new loan to pay off all your others). This should lower your interest rates and monthly payment and, in turn, help you get out of debt faster. Of course, taking out a new loan increases your risk in the eye of lenders, which theoretically should lower your credit score. However, this should be balanced out by the positive impact of paying off the outstanding loans reflected in your credit report.
  3. Get Credit Counseling. Like options one and two, credit counseling also involves paying off the full balance of what you owe. However, credit counselors work with creditors on your behalf to lower payments, fees, and interest rates. The credit counselor also collects your payments each month and pays creditors on your behalf. Though FICO typically does not count against your reports of “making payments via a credit counselor,” this option can hurt your score via the required closing of all your credit cards. Theoretically, this should lower your credit utilization rate, but if all the cards are maxed out, it’s not as if they were helping much in that regard in the first place.
  4. Negotiate/Settle Your Debts. Instead of paying your balances in full, this option enables you to negotiate with creditors and settle on less than the amount owed. Unfortunately, “paid less than full” counts as a pretty strong strike against your credit. Your credit score represents your risk as a borrower and, naturally, if you fail to live up to your obligation of paying your debt in full, your score will be lowered accordingly.
  5. File For Bankruptcy. Depending on whether you file Chapter 7 or 13 bankruptcy, all or much of your debt will be forgiven. A Chapter 7 bankruptcy will stay on your report for up to 10 years, Chapter 13 only up to 7 years, as it requires you to pay at least some of the debt you owe. Probably needless to say, both count as big strikes against your credit.

Which Debt Relief Option Will Help Your Credit The Most?

The best way to help your credit, guaranteed, is to find a way to pay off your balances on your own. This will have only a positive impact on your credit. Since bankruptcies remain on your credit report for 7 to 10 years, they have the most negative impact on your credit. That said, debt negotiation and settlement run a close second, as your credit risk is considered considerably higher when you fail to pay, as agreed, what you owe in full.

Which Debt Relief Option is Right For You?

To answer that question you will need to do your homework. The information shared here is a good place to start, but should only be the beginning of your research. Other debt articles here at can help, including our comprehensive coverage of credit counseling, debt negotiation and settlement, and bankruptcy.

Can You Improve the Negative Impact of Debt Relief on My Credit

Absolutely! Once you have completed whichever debt relief option is best for you, keep any and all loans current and paid to a zero balance every month. If after your debt relief you are left with no open accounts, get yourself a secured credit card that reports to the credit reporting agencies. Use your credit on a regular basis, but only as much as you can afford to pay off at the end of every month, which is the ideal way of proving you understand how credit works and are disciplined enough to use it responsibly.

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