Does Debt Relief Affect Your Credit Score?

Your credit score offers a real-time snapshot of your financial life, responsibilities, and wellbeing. The inner workings of the credit score can be tough to understand, though. In the U.S., three major credit reporting bureaus compile credit data and issue reports for consumers and lending agencies. These reports compile into what you may know as the FICO credit score.

If you’re pursuing debt relief, though, you might have another question. Will debt relief affect your credit score? Is it a good thing or a bad thing, as far as your FICO score is concerned? Here’s what you need to know.

The Range of Credit Scores

At its lowest, a FICO score can sit around 300. A perfect score, on the other hand, is 850. While those are the two extremes, there are many people in the U.S. with good scores that fall right around 620. Scores higher than 750, meanwhile, are regarded as excellent. If you’re not applying for credit, you might not think much about your credit score. When you go to apply for a car loan, credit card, or mortgage, though, it becomes essential. Lenders look at these credit scores to determine your reliability as a borrower.

How Debt Relief Impacts Credit Score

If you’re grappling with excessive debt and looking for a way out, you have a few different options. Each impacts the credit score in different ways. These are as follows:

  • Bankruptcy. Bankruptcy is a thorough debt relief tool, but a difficult one. Bankruptcy isn’t recommended for anyone but people in dire financial situations. If you declare bankruptcy, it will have a massive, negative impact on your credit score, which will remain for 7-10 years.
  • Debt Settlement. Debt settlement is an alternative to bankruptcy. It’s also a more often-recommended approach, as it has a mild impact on credit score. Whereas bankruptcy can cause a credit score to drop by hundreds of points, debt settlement results in about half the drop. This may make it easier for you to procure a mortgage or car loan again after your debt settlement process is over. Additionally, debt settlement takes about 2-4 years to wrap up, compared to as many as ten for bankruptcy.

Protecting Your Credit Score During Debt Relief

If you’re planning on pursuing debt relief, it’s essential that you also understand its impact on your credit score. While debt relief can be an essential step to getting back on your financial feet, it’s critical to remember that your credit score will follow you long after the debt relief is over.

With that in mind, be sure to research your debt relief options before you take any action. Talking to a debt relief specialist is also a great way to ensure you’re making smart choices and protecting your financial future.

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