According to the Pew Charitable Trusts, 80% of Americans have some form of debt. A sizable number of Americans with debt will have to undergo some form of debt relief at some point in their lives.
For many, there is simply no way to go around accumulating debt in the first place. The gap between the rise in the cost of living and the average rise of wages has kept increasing for more than 30 years to the point that many Americans see debt as a necessity for an acceptable standard of living.
Subsequently, the anxiety of maintaining a good credit score is fast becoming prevalent about Americans that have built their lives with houses paid for with mortgages, college education paid for student loans, and day-to-day expenses paid for with credit cards.
To be blunt, nearly sort of debt relief strategy that involves renegotiating the terms of your debt will have a negative impact on your credit score. Your creditors will definitely see the inability to abide by the original terms of debt as an indicator of risk, and your credit rating will take a hit.
Strategies that do not involve negotiation or other problems for creditors will generally be better for your credit rating, though they are not always an option in most cases.
Here’s how different debt relief strategies can potentially impact your credit ratings:
Counseling
If the debts are still manageable, debt counseling to help you control your spending can be the ideal way to get out of debt without affecting your credit rating at all. This typically involves a drastic change in your spending habits and daily routines. However, this isn’t always a sufficient option, especially if the debt is necessary to help you cover day-to-day expenses, or if you have grown accustomed to a certain type of lifestyle.
Debt management and debt consolidation
Depending on how your creditors see things, these strategies can have a short-term impact on your credit rating, though most debtors will see their ratings recover in just a few years. If you’re able to make consistent payments on your plans or are able to pay everything off early, you might even see an improvement in your credit rating.
Bankruptcy
Bankruptcies can be necessary for financial survival in many cases. Unfortunately, they will definitely leave a mark on your credit report for quite a long time – up to 10 years from the time the bankruptcy was filed. The type of bankruptcy also matters. For instance, a Chapter 13 can be easier to pay off than a Chapter 11 or 7, and you might be able to get it off your credit report in seven years or less.
Debt settlement/negotiation
From a creditor’s perspective, it’s bad business to allow someone who’s regularly paid on time to settle their debts. They will usually only allow this if you have been consistently negligent in your payments. The fact that you had to renegotiate a debt is a huge red flag to other potential creditors, who will rightly see you as unreliable. Your credit rating will definitely take a hit for an extended time.
Be sure to get in touch with a debt relief specialist for a better picture of what can happen to your credit score.
