So, you’ve settled on debt relief to get your finances back on track. Good for you. You realize your debt has held you back, and you’ve chosen a proven strategy. But does credit relief hurt credit scores? Well, let’s check that out.
Your Credit Scores
Think of your credit scores as at-a-glance summaries of your finances. In the United States, three major credit bureaus issue credit reports, and most consumers have score based upon them.
These range from 300 to 850, although most U.S. residents are somewhere in between. Generally, scores under 620 are considered fair or poor, while those in the mid-600s or higher are regarded as good or acceptable. If you’re fortunate enough to have scores higher than 750, well, those are considered excellent. Scores will vary by a few points according to which bureau a lender consults;though they are not likely to be markedly different.
What About Debt Relief and Credit Scores?
Does credit relief hurt credit scores? The process of debt settlement does hurt your credit scores, but let’s face it: your scores haven’t been great for a while now if you need some form of credit relief. What’s more, after your debts have been settled and your spending is under control, your scores will rebound – and then some. So, ultimately, a temporary drop in your credit scores is necessary for a clean financial start.
What About Bankruptcy?
While filing for bankruptcy protection is a formidable debt relief tool, it does heavily damage your credit for seven to 10 years, depending on whether you choose Chapter 7 or Chapter 13. Either way, you’ll find it difficult, if not impossible, to get manageable loans, lines of credit or low-interest plastic during that interim.
Which is Better for My Credit, Debt Relief or Bankruptcy?
Many experts say debt relief is a better option than bankruptcy, mostly because the financial approach has a relatively moderate effect.We’ve established that debt settlement will initially affect your credit scores. Still, the tumble you’ll experience with debt settlement is less jolting and more ephemeral. Overall, debt settlement will likely cause your credit scores to decrease by roughly half as many points as bankruptcy.
Because the score decline is usually less, it’s much easier to start rehabbing your credit following debt settlement than after bankruptcy. You’ll have more chances to get the credit necessary to begin jump-starting your financial life.
Also, debt relief programs usually conclude within two to four years. On the other hand, the fallout from bankruptcy will hang around for many years. During this period, you may be unable to procure a credit card, bank account or car loan.
Improving Your Credit After Debt Settlement vs. Bankruptcy
Once you complete a debt relief program, all you must do is make your payments. Doing so accounts for 35% of your scores. Just open and use a card with a small limit, being certain to pay off the balance monthly.
By contrast, it’s much harder to rebuild your credit scores following bankruptcy.
You may have trouble gaining any sort of credit for up to three years. Your insurance premiums may increase, and you could have problems renting an apartment. Thinking of buying a house? Forget about it for a decade,after which bankruptcy finally disappears from your reports.
So, does credit relief hurt credit scores? Not too badly, especially when compared to bankruptcy, which is your other option. And most importantly, it’s easier to improve your scores after settlement than after bankruptcy.