Money Matters - Simplified

How Does Debt Relief Affect Your Credit Score

Debt relief and credit score Debt relief provides an instant work-out, but may harm the credit rating

If you are feeling overwhelmed by your debt load, you may be tempted to seek out debt relief. However, you must keep in mind that debt relief can have a negative effect on your credit score.

Debt relief involves consolidation of multiple debts and chalk out a manageable schedule for paying out debts.

Debt relief may provide cushion against the creditors, but can dent an individual''s credit score.

A credit counseling agency can be of tremendous help when it comes to discuss debt management with multiple creditors.

What is debt relief?
Debt relief usually involves negotiating with your creditors, either on your own or with the help of a credit counselor, to reduce the amount of debt you owe. It can be as simple as canceling late penalties and finance charges or as complex as reducing the principal amount you owe.

Debt relief differs from debt consolidation, which usually involves combining debts and refinancing to get a lower interest rate and lower your monthly payment. With debt relief, you actually wind up paying back less than you owe and in some cases even less than you originally borrowed.

How does it work?
Though you can try to work with your creditors on your own to lower debt relief, such as calling or writing to creditors and asking them to eliminate late fees in exchange for full payment of your principal amount, you will likely have better luck working with a credit counseling agency.

These agencies negotiate with your creditors on your behalf to set up a debt management plan, in which you pay one payment to the credit counseling agency, which then disburses the agreed upon amounts to each creditor. The advantage to this is that it`s convenient, because you only have to make one payment each month.

Effect on credit score
The effect that debt relief has on your credit score will depend on a lot of factors. If you are at the point where you are considering debt relief, your credit score has probably already taken a hit. For example, if you have missed payments, your creditors will have reported that activity to credit bureaus and it will have a negative effect on your credit score.

If you go it alone and ask creditors to reduce late fees and penalty fees, you can request that they report no further adverse information to the credit bureaus. That doesn`t mean they will honor your wish, but it doesn`t hurt to ask. If you negotiate a reduction in principal, your creditor will report the amount as a charge-off, which will get reported to the credit bureaus.

Likewise, if you go through a credit counseling service to set up a debt management plan, this will likely be reported to the credit bureaus, which will negatively affect your score. You may also be forced to close any credit card accounts you are paying off, which could also hurt your score.

Keep in mind that the effects of going through debt relief are much less than if you declare bankruptcy. Long term, you can mitigate these effects and gradually improve your credit score by staying current on future payments and keeping your debt levels low.

After going through debt reduction, check your credit report to make sure all accounts have been reported as paid in full.
If you are struggling with your debt and considering debt relief, check out nationaldebtrelief dot com You can find information on the process and decide whether it`s the right decision for you.

originally published on 2013-02-22.