How Does Being in a Debt Relief Program Affect Credit?

If you have fallen behind on paying back unsecured debts such as credit card bills, debt relief may be an option. Debt relief programs allow you to pay your debt management company a lump sum each month, which it then distributed to your creditors. You can pay off your debts using such a program, often at reduced interest rates; however, you must consider the effects of the program on your credit.

Short-Term

Debt relief may negatively impact a person's credit in the short term. Credit reporting agencies note in the person's credit history that he is enrolled in a debt relief program. This may make some creditors hesitant to extend credit to the debtor because people generally enter debt relief only after falling far behind on their debts and damaging their credit.

Credit Score

The debtor's credit score may go up over time. Debt relief allows debtors to pay off debts at reduced rates; often, debtors pay less than the full amount of the debt when they enter debt relief. This makes it more likely that the debtor will be able to make monthly payments and eventually pay off the debt. Paying back debts always positively impacts the debtor's credit score, and collections accounts are removed from her credit report once they are paid off.

Initial Credit Rating

The effect of debt relief on your credit depends upon how good your credit was prior to debt relief. If you had good credit -- i.e. you only have one or two problematic debts but have paid everything else on time -- entering debt relief can devastate your credit rating. If your credit was poor, however, debt relief will initially have a negative effect but will improve their credit rating somewhat once the debt is paid off.

Considerations

Before deciding to enter debt relief, think about the potential effect on your credit. You may be able to settle your accounts on your own by talking to your creditors, which will not negatively impact your credit rating. You must also consider how likely you are to be able to make payments to your debt relief provider on time. If you have trouble doing this, you will not be able to clear the debts from your credit history and will have an additional black mark from entering debt relief.