Debt Relief Without Harming Your Credit

Consumers who have large amounts of debt sometimes turn to drastic measures to try to get out of it quickly. Depending on what type of debt relief you pursue, it could negatively affect your credit. Even though options like bankruptcy and debt settlement can hurt your credit, a few other options that will not harm your credit score are available.

Credit Damage

When you have a large amount of debt to deal with, you may not want to pursue certain debt relief options because of the potential impact it could have on your credit. For example, debt settlement is an option that allows you to pay off your debt for less than what you owe with a lump sum. This action can reduce your credit score by as much as 125 points, according to MSN. You could also pursue bankruptcy, but that option can drop your credit score by as much as 240 points.

Debt Management Plans

One option that will not negatively affect your credit score is a debt management plan. With a debt management plan, you set up a repayment plan with your creditors and then make monthly payments toward your debt. It typically takes three to five years to pay off your debt with this kind of plan. It is usually set up with the help of a credit counseling service. This does not have any direct impact on your credit score.

Debt Consolidation

In some cases, debt consolidation can be completed without hurting your credit score. If you simply take out a home equity loan or some other kind of personal loan and use the money to pay off your credit accounts, it may not affect your credit score. If you close out all of your credit accounts after you pay them off, it can hurt your credit score because it negatively affects your credit utilization ratio. Leave your accounts open after you pay them off to keep your score from being damaged.

Getting New Credit

When you use a debt management plan, it will not negatively affect your score, but you may not be able to get new credit while you are on the plan. Many of these plans require you to avoid getting your credit while you are enrolled. After the plan is over, you can get new credit without having to worry about your credit score being affected. During the plan, you have to get used to dealing with cash.