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How Does Credit Card Debt Relief Affect Your Credit Score

Paying high-interest debts is a common financial woe that affects millions of America. If you are among the number, you may constantly worry about your credit score. 

Fortunately, debt relief programs such as debt settlement and credit counseling offer consumers a way out of their financial problems. Their mode of approach to your financial freedom varies. 

For example, some work by negotiating with lenders into minimizing your interest and reducing monthly payments. Others talk your creditors into substantially reducing the amount you owe while sometimes it’s the extension of your repayment terms for a year or two. 

Whatever the case, debt relief programs pose a negative effect on your credit score. Below is the answer to your question, question how does credit card debt relief affect your credit score?

How debt relief works

The methods used in credit debt relief vary based on the type of program. We now look at the different debt relief programs, how they work, and how each affects your credit score.

Debt settlement

Debt settlement as a form of debt relief involves negotiations between representatives from a debt settlement company such as those, you’ll find at  https://www.freedomdebtrelief.com/ and your creditors to lessen your debts. Although the idea of paying less what you owe seems attractive, there are different downsides to this program. Your creditors or lenders are not obliged to agree with your representatives during the dialogues.

In such cases, you will spend much time with no results. But if your creditors agree, the debt settlement companies will require you to restrain from making payments to your lenders. Instead, you will make direct payments to an escrow account, for at least 36 months. During this time, your debts will accrue interest and penalties for missed or delayed payment. If the program succeeds, the debt settlement record will still be present on your credit score for at least 7 years.

Debt consolidation

Debt consolidation merges all your debts or liabilities into one loan, which allows you to make monthly payments. It is an effective way to streamline your finances especially if you have a habit of forgetting making payments to your different creditors. There are different prerequisites you need to meet for you to qualify for a consolidation loan. For example, your creditors will need proof of a stable source of income and check into your credit score. 

While people with bad credit scores still qualify, the consolidated loan comes with very high interest rates. There are different avenues for you to consolidate your debt including personal loans, home equity, credit card balance transfer and debt management. While choosing a suitable method for you, consider factors such as your debt-to-income ratio and credit score. 

Debt management

Here, your credit counselor negotiates with your creditors or lenders for lower interest rates or fee waivers. You may need to make monthly payments to your counselor, who will then redirect the funds to your creditors. They pay your lenders depending on the agreement they had. If you are considering this program, understand that you may have to confirm and be updated on any changes which your counselor and creditors will agree on. However, there is no guarantee of successful negotiations between your counselor and creditors. There’s also a risk of falling prey to a debt management scammer. 

Bankruptcy

Bankruptcy is usually the last resort for most consumers after the other methods cannot work. You may consider this if settling all your debts will take you over 5 years. It is a complex legal process that requires you to attend many court sessions. For the court to declare you bankrupt, a comprehensive review of your finances and liabilities takes place to ensure that you have exhausted all other debt-relief options. 

The court’s decision depends on the chapter on which you filed your case. The court’s ruling may include a reduction in most of your debt and an order to your creditors to restrain from reaching out. Bankruptcy allows you a fresh start into a new beginning with a hefty lesson on financial management. 

Even if your credit score has gained a dent from financial strains, it is never too late to prevent further damage. The question how credit card relief affects your credits score makes you aware of the consequences of each debt relief program. 

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