How does a debt relief program affect your credit?

Posted by Amos Fred on November 15th, 2019

When finances are tight, debt relief programs seem like a godsend. However, it’s important to understand what debt relief is before you move on to your options, especially since some companies use the term interchangeably with debt settlement. Make sure you know what you’re getting into before you pick a solution. Start with the basics.

What is debt relief?

The term refers to any solution that makes it easier for you to clear your debts. This can include debt settlement programs, debt management programs, debt consolidation loans, and balance transfers. Each of these options offers pros and cons. Consider them all and review their merits individually to work out, which suits your needs and situation.

What is a debt settlement plan?

Debt settlement is a type of debt relief solution, as are consolidation and debt management plans. If you are looking for debt relief programs, then read up on these options. Unlike the other two programs, debt settlement only pays back a portion of the amount you owe. As a result, choosing this arrangement will damage your credit score every time you settle a debt, the NerdWallet says. However, the upside is that it offers the fastest and cheapest way to get yourself out of debt without resorting to bankruptcy. That’s why it’s not altogether a bad solution.

What is debt consolidation?

If you pick this option, you’ll take out a new loan to pay off some of your liabilities and debts, usually the unsecured ones. You typically combine all your debts into one big debt, one that can give you better payoff terms, the Investopedia says. With a new loan, you can lower your monthly payments, get a favorable interest rate, and more. If you have student loans, credit card debt, or other types of debt, you can think about debt consolidation as a solution.

What is debt management?

When you sign up for a debt management plan, you make an unofficial agreement with unsecured creditors. They will repay your debts over a specific timeline and give you more time to work on repaying what you owe. The creditors will offer a Statement of Affairs (SOA). If the arrangement pushes through, you will offer your disposable income to the creditors and pay them in regular installments. The installments will be distributed to your creditors to make it easier for you to repay your debts. The goal of the program is to help you develop practices and allow you more time to clear your debts at a level that you can afford. Also, you will develop better spending and saving habits at this time that will teach you to manage your finances better. This will prevent you from making the same decisions that landed you in debt in the first place.

How will it affect your credit?

Each program will affect your credit differently. Evaluate the programs to find out which option is best for you and your credit. In case the option you pick dings your credit, no worries. You can always work on a plan to improve it once you clear your debt.