How Do Debt Relief Agencies Affect Credit Scores?

Utilizing Debt Relief Agencies

Many people turn to debt counseling agencies before considering debt relief agencies. This may be a better option because they have less of an effect on credit scores. With debt counseling agencies, your credit score is not affected, although a note is issued to the credit bureaus that you are paying your debts through a debt counseling or debt management agency. With debt relief agencies, you can often pay down your outstanding debt with one lump sum a month--minus any fees and penalties the agency was able to get waived--but you aren't able to use current credit cards or apply for any other credit services. This would require you to take on more debt. In addition to this, the credit bureaus are notified of your debt relief usage and, depending on your credit score, effectively lower your credit score by as little as 50 to more than 200 points.

Current Credit Score

How much your credit score is affected by a debt relief agency depends a lot on what your current credit score is. Scores below 560 are not generally affected as much as scores above 700. This is because a 560 score is not typically considered a good score to begin with. Lenders examining a loan for a person with a 560 credit score already know that there is some degree of risk when lending to this person. Conversely, lenders know that an individual with a 740 credit score has a solid record of being a responsible, credit-worthy borrower. All of this changes, however, if that individual must rely on a debt relief agency. In general, individuals with a credit score of 700 or better may want to consider refinancing or restructuring mortgages or loans. If these aren't options, debt consolidation services are the next alternative because they have less of an impact on credit scores than debt relief agencies.

Benefits

Even though a debt relief agency may initially negatively affect an individual's credit score, the benefits that may come with receiving this type of assistance are likely to improve one's credit score in the long run. Therefore, depending on one's circumstances, it's usually a better idea to take the short-term hit in order to get on the road to long-term credit benefits. The only time this may not be advisable is if an individual already has an application out for a loan that is badly needed. In this instance, it may be better to keep one's credit score solid than to take on the help of a debt relief agency. Remember, however, that you can always visit a financial counselor or adviser who may be able to provide advice or services that can help you with your debt, with no effect on your credit score.