Dealing with Debt Without Hurting Your Credit

Dealing with Debt Without Hurting Your Credit

If you’re having trouble keeping up with credit card payments, your credit scores have likely already taken a bit of a dip. You know you must act to get atop your situation, but you’re concerned about choosing a solution that will not worsen your credit. So, does debt relief hurt your credit? Well, here’s what you should know about dealing with debt without hurting your credit.

Debt Consolidation

Your options might include consolidation. Combining debts into a single payment, ideally at a lower rate, makes it easier to manage your monthly bills. People commonly accomplish this with a debt consolidation loan or a balance transfer credit card.

A consolidation loan generally requires a lower credit score than a balance transfer card. This is because it’s an installment loan which might even help your credit mix. Also, if your credit card balances are moved to an installment loan, that can reduce the amount of credit you’re using.

However, you risk running up debt again on your newly cleared cards if you don’t have your spending under control. Thus, your credit will suffer if you can’t handle the payments according to the terms of your loan agreement.

Meanwhile, a zero-percent balance transfer card allows you to shift your higher-interest balances onto it. Then, you can pay them off during an introductory period of several months or more. After that, the rate goes back up.

If you use lots of your new card’s credit limit, your credit scores may take an initial hit due to high credit utilization.

Home Equity Loan or Line of Credit

Generally, it’s not ideal to exchange unsecured debt such as credit card obligations with secured debt such as a mortgage or car loan. Why? Because your house or vehicle is on the line. Your credit will also be subject to a hard pull.

Debt Management Plan

While getting an accredited credit counselor to set up a debt management plan (DMP) will not directly hurt your credit, closing credit cards – which most DMPs require – can. Also, your enrollment in such a plan will be noted on your credit reports until the DMP is completed.

401(k) Loan

Borrowing from your 401(k) account has no effect on your credit score. However, you’ll be sacrificing investment returns and a portion of your retirement income.

Negotiation with Creditors

Ideally, you’ll contact your creditors before your debts reach collections, and attempt to work out a payment arrangement. You may be able to get a reduced interest rate or waived fees. Some card issuers will give special consideration to hardship cases.

Debt settlement, also called debt relief, is generally for those whose debt situation is beyond the efficacy of the above solutions. It calls for hiring a company to go to your creditors. They can see whether they’d allow you to settle your debts for a one-time payment in full. While there are no guarantees, creditors usually go along with it. This is because they know that if you file for bankruptcy, they may get nothing.

It is true that enrollment in a debt settlement program will likely cause your credit scores to drop. That’s because, in lieu of paying creditors directly, those funds are saved for settlements. Note, though, that a bankruptcy filing can stay on your credit reports for seven to 10 years, depending on whether Chapter 11 or 13 is filed. However, it should be noted your credit score has likely already been negatively impacted if debt settlement is your most viable approach.

Keep in mind though; your credit scores generally won’t drop as much with debt settlement as they would with bankruptcy. This means credit rebuilding is generally easier with the former than the latter. You’ll have more opportunities to open credit and start anew.

Dealing with debt without hurting your credit depends on your financial situation and your existing scores. After all, solutions such as consolidation generally require good credit to begin with. And, while you can negotiate with creditors on your own, it’s best to enlist the help of professionals who know the ins and outs of debt relief.

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