How Do Debt Relief Programs Affect Your Credit?
If it feels like your paycheck is spent before it hits your bank account, you’re not alone. The average American is trying to manage roughly $38,000 in debt, and that doesn’t include a mortgage. With school loans, car notes, credit card debt and personal loans, it’s not hard to see why 1 in 5 Americans spend 50 to 100 percent of their monthly income on debt repayment. In order to escape the rat race of paying off high-interest loans, many are turning to debt relief programs.
There are two main challenges with paying off debt through a relief program: understanding the differences in available programs and choosing a trustworthy organization to help devise a debt relief plan. UmbrellaDEBT understands these challenges, so we’re taking the time to explain the two most popular debt relief programs and offer a transparent look at how your credit score will be affected.
What Is Debt Settlement?
When you partner with a debt settlement company to reduce what is owed, the company negotiates on your behalf to lower the total amount due. Those who use the settlement process offered by debt relief programs typically owe a significant amount to one creditor, but it is possible to use the process with multiple creditors.
Using debt settlement when you have multiple creditors can present more of a challenge. Those negotiating on your behalf must approach each creditor to get them to agree to a lower amount due. When your debt is settled, the creditor marks the account as “settled” or “paid settled” on your credit report, which is visible for seven years.
What Is Debt Consolidation?
Partnering with trusted debt counselors for debt consolidation is an effort to combine your debts from numerous creditors. When the debts are consolidated into one monthly bill in a creditor agreed upon Debt Management Plan. Debt consolidation is a great way to reduce the number of payments that go out each month, and, when you work with an experienced service provider, you are likely to reduce the monthly amount and interest rates if you qualify for such a program.
Credit Score After Debt Relief Programs
While it can be troublesome to think about your credit score possibly lowering through a debt consolidation or debt settlement program, the move can set you up for a speedier recovery if you have $0 in debt. In order to rebuild your credit score following the successful completion of a debt relief program, you can try to follow these 2 simple steps:
- Pay all bills on time once you are out of debt
- Do not incur more debt following
Reestablishing your credit score is done through managing all of your loans and credit accounts. Begin to practice the management of your accounts by only taking on debt you can pay off each month to keep your accounts in good standing. Timely payments and keeping your debt-to-credit ratio in the 1 to 10 percent range are the two largest factors in bettering your score.
Don’t become overwhelmed by your debt. UmbrellaDEBT will help explain the different Debt Relief options you may have and help you decide between debt settlement or debt consolidation, depending on your situation.