If it feels like your paycheck is spent before it hits your bank account, you’re not alone. The average American is trying to manage roughly $38,000 in debt, and that’s excluding a mortgage. With school loans, car notes, credit card debt and personal loans, it’s not hard to see why 1 in 5 Americans spend 50 to 100 percent of their monthly income on debt repayment. In order to escape the rat race of paying off high-interest loans, many are turning to debt relief programs.
There are two main challenges with paying off debt through a relief program: understanding the differences in available programs and choosing a trustworthy organization to help devise a debt relief plan. Christian Debt Counselors understands these challenges, so we’re taking the time to explain the two most popular debt relief programs and offer a transparent look at how your credit score will be affected.
What Is Debt Settlement?
When you partner with a debt settlement company to reduce what is owed, the company negotiates on your behalf to lower the due amount. Those who use the settlement process offered by debt relief programs typically owe a significant amount to one creditor, but it is possible to use the process with multiple creditors.
Using debt settlement when you have multiple creditors can present more of a challenge. Those negotiating on your behalf must approach each creditor to get them to agree to a lower amount due. When your debt is settled, the creditor marks the account as “settled” or “paid settled” on your credit report, which is visible for seven years.
What Is Debt Consolidation?
Partnering with trusted debt counselors for debt consolidation is an effort to combine your debts from numerous creditors. When the debts are consolidated into one amount due, a single loan is used to pay them all with the goal of achieving a better interest rate and lowering your monthly payment.
Debt consolidation is a great way to reduce the number of payments that go out each month, and, when you work with an experienced company, you are likely to reduce the monthly amount paid. Essentially, you take a new, low-interest loan, to pay off old debt.
Credit Score After Debt Relief Programs
Debt consolidation or settlement can impact your credit score, but the dip you see will depend on your current credit report standing. For example, a customer with a score of 680 who was late on, or has missed one payment, can expect to see a negative impact of 45 to 65 points. However, a customer with a score near 780 that’s been timely on all payments will see a deduction of 140 to 160 points.
While it can be troublesome to think about your credit score lowering through debt consolidation or settlement, the move can set you up for a speedier recovery. In order to rebuild your credit score following settlement or consolidation, follow these steps:
- Pay all statements through the debt consolidation or settlement negotiation process.
- Pay all bills on time following consolidation.
- Do not incur more debt following consolidation or settlement.
Reestablishing your credit score is done through managing loans and credit accounts, so don’t close all credit cards once they’re paid off. Begin to practice the management of your accounts by only taking on debt you can pay off each month to keep your accounts in good standing. Timely payments and keeping your debt-to-credit ratio in the 1 to 10 percent range are the two largest factors in bettering your score.
Don’t become overwhelmed by your debt. There is a way to pay off what you owe without sacrificing your assets and completely dismantling your credit score. Christian Debt Counselors will explain your options and help you decide if settlement or consolidation is better for your situation.