Debt Relief and Credit Worthiness
Debt Relief & Credit Worthiness
When choosing which debt relief option is the absolute best choice for your current situation, it's crucial that you consider your circumstances. What may appear to be the best option for you will not be the best decision for someone else.
To assist you in making the best financial decision possible, we've provided a look at the most prominent choices available to you and how they will impact your credit:
- Debt Relief Programs
- Debt Avalanche and Debt Snowball Method
- Debt Consolidation Loans
- Credit Counseling and Debt Management Options
How Do Debt Relief Programs Affect Your Credit?
Debt and credit go hand in hand. So, if you have a lot of debt, odds are: you may already have poor credit.
With that being said, debt relief programs will have an impact on your credit score. How significant the impact will be is highly dependent on where your credit currently sits. Someone that has a 740 credit score will see a more pronounced impact than someone with a 610 score.
The utilization rate associated with your revolving debt makes up approximately one-third of your overall credit rating. So, if you have a high utilization rate, your credit is probably not be in great shape already.
However, one thing to note, each time you repay your debt, your credit rating will always improve with it. And this is particularly true with revolving debt like credit cards, as the balance gets closer to its maximum limit your credit will be negatively effected, and vice versa. For this reason, it is always advised to keep your utilization rate below 30% to avoid having an impact to your credit worthiness. The coronavirus pandemic has significantly impacted credit for all Americans, so it's important to stay on top of your finances.
Although, lowering your debt is never a bad thing and will never have a negative impact to your credit worthiness, if you close an account in conjunction to paying it off it may actually lower your credit score! As an example, paying down debt and then closing that one account may lower the overall age of credit accounts and utilization rate, which comprises about 20% and 15% of your credit score, respectively. One common misconception about credit is that having debt is good for your credit, but this is just simply false! Have high credit availability is good for your credit, having high credit card debt is never good for your credit.
The kind of debt relief plan that you employ can also negatively or positively impact your credit rating. Some debt settlement and debt relief options, make use of some strategies that may have a more damaging impact than other sorts of debt relief plans and programs. Keeping your current credit score in mind, some debt relief programs may not have much of a negative impact at all, if your credit has already taken a hit.
The Strategic Nature of Debt Relief Programs
After you have a better understanding of your credit worthiness and the possible impacts any options can have on it, you can choose three different ways to employ debt relief for your particular financial situation. These methods include the snow-ball method, debt-consolidation, and credit counseling. Each debt relief option has its own associated advantages and disadvantages and its own impact on your future credit standing.
The Debt Snowball and Debt Avalanche Methods
The debt snowball and the debt avalanche are both tried and true methods of paying off your debt. The selection between snow-ball or the avalanche often relies on a matter of your personal choice.
The debt snow-ball is actually when a person repays your debts one by one, beginning with those that have the lowest balance first. This reduces those debts and the interest payments associated with those accounts and helps you rebuild your credit quickly.
While the debt-avalanche is when you repay your debts one after the other, but you begin with those that have the largest balance. However, the debt avalanche method takes more time to completely pay off debt and rebuild your credit score, you will be getting rid of your debt in a large and more impacts way. This method requires more significant payments be applied to a larger chunk of your overall debt total.
At the end of the day, both options are much better than just making your minimum payments as that will end up getting you no where. Additionally, so long as you go continue to make your required payments on all accounts while you use these methods you will see an improve in your debt to income and credit worthiness. Both of these methods may be suitable to your financial situation and if you stick to them in the long term they will definitely have a positive affect on your credit worthiness and save you money from interest you would’ve otherwise paid.
Debt Consolidation Loans
Debt-consolidation loans and money transfer cards can assist you to manage the debt just by gathering some multiple credit lines under only one loan or a card as per your needs. Although this may help by helping you make one payment instead of several, it’s not a strategy that really gets you debt-free. You are borrowing to payback what you already borrowed! Although if you have outstanding credit this option may be suitable to at least get you an overall lower interest rate and have one more manageable monthly payment.
Loan consolidations may often offer lower rates of interest than the original lines of credit themselves, which definitely lets you pay down the debt easier and faster. Additionally, having only one lower payment per month makes it much easier to prevent late or missed payments and are much more convenient for your financial planning overall.
Credit Counseling and Debt Management Guidance
A credit counselor is an adviser that assists you to manage and pay off your debts via budget planning. According to Counsumerfinance.gov, credit counselors are typically non profit companies that will attempt to assist you in managing your money and create a financial budget and plan to help you re-establish a good financial standing. The problem with credit counseling is that they typically still charge a substantial amount of money (even though they may be non-profit organizations) and most people that enter credit counseling programs do not tend to finish them. Although debt relief programs may sometimes get a bad reputation, they do tend to be more effective than a lot of credit counseling options. Debt relief programs may negative affect your credit but they will at least get rid of the underlying debt issue. Before you sign up for any option, debt relief or counseling, always make sure you know about the possible impact the debt relief plan will have on your finances. Ask questions and make sure you do your due diligence on all companies!
Getting Out of Debt
No matter which method of debt relief you have chosen, the ultimate goal should always be to repay the debt and save as much money from interest payments as possible. By doing this, you will be able to save and invest in your future. If you are not making progress on your current debt obligations, a temporary hit to your credit may very well be worth the various debt relief options available to you. Your ultimate goal should be to pay back your debt and save money! It should not be to worry about building your credit, because often times, debt is the underlying issue that is keeping your credit poor in the first place.