How do debt relief programs affect the credit score

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Debt settlement programs are typically offered by for-profit companies, and involve them negotiating with your creditors to allow you to pay a “settlement” to resolve your debt – a lump sum that is less than the full amount that you owe.

Most debt relief programs and companies exist for individuals and for small business owners. This is simply because many small business owners personally guarantee some of the business credit cards and loans; business credit can appear on a consumer credit report, thus affecting personal credit ratings as well. Many consumers and small business owners drowning in debt wonder if using one of the debt relief programs has an effect on a credit rating. If debt relief does affect credit ratings, some wonder if it has a positive or negative effect.

Debt relief typically involves working with a debt consolidation company to help you consolidate debt to pay it off faster and by paying less interest. Debt relief of this kind doesn’t eliminate debt as a bankruptcy may, but instead creates a plan for you to regain control of your personal or small business debt. Because debt relief usually involves a debt consolidation loan, you need to know that consolidating debt affects your credit rating.

Debt relief affects your credit rating positively because when you consolidate debt, the debts you pay off show as paid debts with zero balances. Paid off accounts can boost your credit rating. In addition, the debt consolidation loan shows on your credit report as new credit. Establishing new credit can also boost your credit rating. To maintain and boost your credit rating even higher, it is imperative that you always make the monthly payments for the debt relief program on or before the due date.

Turning to a debt relief program can benefit you by boosting your credit rating. Debt relief programs can also simplify your debt payments by turning multiple payments into one payment. Through the effort of debt relief programs, you may end up with a lower interest rate than what you were paying on the individual debts – ultimately, requiring you to pay less money and interest in the long-term.

To fully benefit from debt relief, to maintain a high credit score or to boost your credit rating, you have to commit to using the debt relief program and always making your payments on time. Missing payments or making late payments can cause your credit rating to plummet even after the debt relief program is in place. Even if you pay off debts with the debt relief program or consolidation loan, keep the credit accounts that you have long relationships with open. Closing credit card accounts with long relationships can have a negative effect on your credit rating, so even if you aren’t using the account and you have consolidated the debt on the account, you may want to keep it open.

People believe debt relief can have a negative impact on a credit rating because you had to turn to a debt relief program to help you regain control of your finances but as far as your credit rating is concerned, debt relief doesn’t have a negative impact as long as you are making your payments on time.

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About the Author: James Watt

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