Credit 101

How Do Debt Relief Options Affect Your Credit?

Comments 37 Comments

It’s a question I get all the time, “What’s the best way to get out of debt?” It’s often followed by a comment, “But I have good credit and I really don’t want to hurt it.”

Here are the main approaches to debt relief you may be considering, along with a review of the impact they may have on your credit reports and scores. There are a couple of things to keep in mind here. Just under one-third of your credit score is made up of the debt you carry. So when you pay off debt, especially credit cards that are close to their credit limits, you should see improvement in at least some of the factors that make up that part of your score. But I haven’t specifically included that factor in my analysis of these options, since all of them are designed to help you become debt-free (or to at least get you out of credit card debt).

Also keep in mind that it’s impossible to precisely gauge the impact of a particular approach on your credit. How far your score drops — and how quickly it bounces back — depends on a lot of different factors. If your payment history always shows on-time payments, for example, and you suddenly file for bankruptcy, your scores will probably drop more than someone who was already severely delinquent. Please keep that in mind, and understand that these are general guidelines but they don’t represent exactly what will happen in your case.

DIY: Snowballs and Avalanches

Whether you choose to first pay off your credit card with the highest interest rate (often referred to as the “avalanche” method), or the one with the lowest balance (the “snowball” method), doesn’t make much of a difference. Neither approach will hurt your credit, as long as you are making the minimum payments on all of your cards on time.

Credit Damage: None

Debt Consolidation

Getting a loan to consolidate high-rate credit card debt with a fixed-rate loan at a lower rate isn’t a strategy for getting out of debt in and of itself. After all, you still have to pay back the consolidation loan. But it may be one of the tools you use to get out of debt faster. All things being equal, when your interest rate is lower, you can pay off your debt faster.  And if your monthly payment is also reduced by consolidating, you’re less likely to be late on payments, which can help you stay current with your payments and help your credit score recover more quickly if you’ve fallen behind in the past.

Consolidating credit cards with a loan may have a positive or negative effect on your scores. It’s one of those “it depends,” situations. On the plus side, if you pay off a credit card with a balance that’s close to the limit, you may improve your “utilization ratio” – the ratio that compares your credit limits with the balances you are carrying – provided you  leave the card open after paying it off. (Simply moving balances from one card to another is unlikely to do a whole lot for your scores.) On the other hand, you’ll have a new loan with a balance reported on your credit reports, and most credit scoring models will count that as a risk factor, which could mean a dip or drop in your scores.

The exception? If you use a loan against your retirement account to consolidate credit card debt, you’re more likely to see your credit improve. Retirement account loans aren’t reported to the credit reporting agencies, so your credit reports will show less debt, but no new loan. Still, retirement loans carry other risks, so proceed with caution.

Credit Damage: Modestly positive or negative, fairly easy to recover

Credit Counseling

Simply calling a credit counseling agency for a consultation doesn’t impact your credit at all since the fact that you’ve sought help is not reported to the credit reporting agency. If you enroll you in a Debt Management Plan (DMP), where you make one monthly payment to the counseling agency and it disburses payments to your creditors, however, it can affect your credit in several ways.

Some creditors may report that the account is being repaid through a credit counseling agency. If they do, it’s probably not a big deal. For a while now, FICO has ignored this notation for scoring purposes. An individual lender may care, but FICO doesn’t. Of course, any late payments or high balances on accounts will continue to impact your credit score.

With the help of the counseling agency, you should be able to bring your account current and that can be a plus. “Most major creditors will re-age your accounts after you’ve made three on time payments in the required amount,” says Thomas J. Fox, Community Outreach Director for Cambridge Credit Counseling. Re-aging an account means it will be brought back to “current” status, so your credit report will no longer list that you are currently behind. Since recent late payments can really hurt your scores, being up-to-date on your payments while allowing the past late payments to age will be a plus, especially over time.

Finally, you’ll have to close your credit cards when you enter into a DMP and that will likely lower your scores. How much it will hurt depends on everything else in your credit reports, of course, including whether you have other open available credit such as a car loan or mortgage that you are paying on time. The impact may not be immediate, either, says Barry Paperno, community director for Credit.com. That’s because “balances and limits won’t necessarily change right away, and utilization will be the same as before closing accounts.” He goes on to explain, “Closing an account, in and of itself, isn’t considered negative by the score.  Over time, however, having closed the cards can hurt the score, as closed cards with zero balances are excluded from utilization and ultimately fall off the credit report much sooner than open cards that have been paid off.”

“Plan on getting a secured card when you complete the DMP,” he suggests, “so that as long as you keep a low utilization percentage on that one card, you can achieve a good score, — with any lates fading well into the past.  Also, your old closed cards will continue to contribute positively to your overall length of credit history for as long as they remain on your credit report (typically 7 or 10 years).”

Credit Damage: Typically moderate, fairly easy to recover

Debt Negotiation or Settlement

When you settle a debt, you pay less than the full balance you owe. Since creditors typically won’t settle debts with consumers who are making their payments on time, most consumer’s credit reports will list late payments before they settle. On top of that, “most creditors will report the settlement as something like “paid less than full balance” if you settle the debt before it has been charged-off,” warns Michael Bovee, Community Manager for DebtConsolidationCare.com. (Creditors generally charge off debts when borrowers fall 180 days behind. Charged off debts are then often then turned over to collection agencies.)

He goes onto explain: “When you settle a charged-off debt, getting it reported (with a) zero balance due will not in and of itself help your credit because the damage has already been done.” But it could help you ward off further damage from, say, a potential lawsuit. For an account that hasn’t been charged off yet, settling it before it gets to that point can help prevent it from being turned over to collections and adding another negative item to your credit reports.

Brad Stroh, co-CEO of Freedom Debt Relief adds, “Debt settlement hurts people’s credit scores, but helps their credit profiles. (It’s) worth considering, for anyone struggling to pay a lot of credit card debt, despite its negative effects on credit scores. It is far easier to rebuild one’s credit than to get out of debt, and people carrying a lot of debt likely have credit problems already.”

Credit Damage: Severe, will take time to recover

Bankruptcy

It’s well known that filing for bankruptcy will hurt your credit scores. Bankruptcies can be reported for up to ten years from the date of filing. What’s not as well understood is that credit scoring algorithms typically segment consumers in subgroups called “scorecards.” So if you’ve experienced a significant negative credit event, such as bankruptcy, for credit scoring purposes you are probably being compared with other consumers who have also been though something similar. Not only may that be a little bit comforting, it can also mean you have a good shot at improving your credit scores if you make a real effort to rebuild good credit after your bankruptcy is discharged.

It’s also worth noting that Chapter 13 bankruptcies, where you typically pay back some or all of your debts over a period of three to five years, may be a little easier to recover from, at least as far as your credit is concerned.  That’s because they come off credit reports seven years after the date of filing. So if it takes you four years to complete your Chapter 13 plan, you have to wait only three more years before the bankruptcy disappears from your reports. (Financially, though, you’ll probably end up paying more in a Chapter 13 bankruptcy than a Chapter 7 where you wipe out all or most of your debts so make sure you discuss both options with a qualified consumer bankruptcy attorney.)

Credit Damage: Severe, will take time to recover

Getting Back On Track

Whichever method you choose, keep in mind that the ultimate goal is to pay off your debt so you can save and invest for future goals.  The hit to your credit may be worth it if it means you can finally get your balances to zero.  Monitor your credit, consider getting a secured card if necessary, and keep it in perspective.

“People just worry about their credit too much,” says Fox. “If your couch is on fire, would you not throw water on the fire because you don’t want to damage the upholstery?”

For more Credit 101, check out these posts:

Image: SqueakyMarmot, via Flickr

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: Does Carrying a Balance Help Your Credit? | CreditRanker.com

  • Pingback: How Do Debt Relief Options Affect Your Credit? » Wordpress Real Estate 5

  • Pingback: How Do Debt Relief Options Affect Your Credit? | Wordpress Real Estate

  • Pingback: Short Sale or Foreclosure? Either Way, Your Credit Suffers | moneyrabbit.info

  • lynn

    WHAT IS THE COST OF CHAPTER 7 VS CHAPTER 13?

    • http://www.credit.com Gerri

      Hi Lynn,

      Chapter 13 is typically more expensive than Chapter 7 but I can’t give you a specific total cost for either. It will vary. Your best bet is to talk with a consumer bankruptcy attorney. If you can’t afford to file now, the attorney should be able to help you figure out other options. Keep in mind that they are used to seeing consumers who are at the end of their rope financially, so it’s not something you should be embarrassed about.

      Finally, whether you file Chapter 7 or 13 will depend on a lot of factors – besides the initial cost – so you should get professional advice from an experienced consumer bankruptcy attorney. One place to look is NACBA.org, the National Association of Consumer Bankruptcy Attorneys.

  • Savannah

    I have a rental duplex and it is underwater, owe about 85,000 worth about half that much. At 65 I am thinking about walking away because it is getting too costly to maintain. Detroit is in crisis and I don’t feel safe going there for rents. I spoke to my mortgage company and they stated they couldn’t help me under the President new laws for rental property. I am concern about my credit if I walk away, even at my age. When you are not rich you need good credit.

    • Gerri Detweiler

      Savannah –

      So sorry to hear about what you are going through. I know it doesn’t help much, but you certainly aren’t alone since about one-third of homes with mortgages are in negative equity.

      As for your options, it doesn’t sound like your mortgage lender is interested in working with you. (I have no idea what “new laws” they are talking about but the last time I heard, Congress passes laws and the President can either sign or veto them!) I’d recommend you read my series: Underwater On Your Home? Your Six Options and then get some professional advice. In particular, you may want to look into whether bankruptcy or a short sale can help you.

  • patrick price

    I have a previous chapter 7 bankrutcy and currently in a chaper 13 bankruptcy. Since its not been 10 yrs between the chap 7 and chap 13, can I convert my cha 13 to a chap 7?

    • Gerri Detweiler

      Patrick,

      That’s a great question for a bankruptcy attorney. He or she will have to look at your entire financial situation to determine whether you qualify for Chapter 7.

  • Neicy

    I have heard many negative complaints about debt consolidation programs. (i.e not making payment like they should to the credit card company) I was wondering if you could recommend a company.

  • Bankruptcy Shop

    Bankruptcy is not the credit catastrophe it once was. Certainly filing bankruptcy does not improve your credit and your credit score will suffer if you file. However, you can rebuild your credit within a few years by charging small amounts on a credit card and paying the bill on time every month. Taking out a personal or auto loan (not payday loans) can help improve your score quickly as well if you pay your bill on time every month. After a few years of doing this, your credit score should be in the 700 range. Post bankruptcy, you can thrive and not merely survive if you are diligent about getting back on the road to financial recovery.

    • http://MSN Mari

      I filed a chapter 7 after my husband passed away. He had a a lot of debt and so did I. I was paying all my bills before and whatever of his I could. Well let me tell you. The phone calls were coming in one after another. Much of the debt in my husband’s name was written off, about $120,000. The bankruptcy attorney came up with still $125,000 with both our debts. I had to sell 2 properties before I could file so I did that.That helped pay for the bankruptcy and other expenses. I paid $5000 in 2009 taxes with the money from the sales of the properties.
      To say it was a nightmare is an understatement. I changed my phone number.I got piles of mail.
      After the bankruptcy was complete I traded in my expensive Buick for a Chevy. To my surprise I was approved for a new Chevy, a wonderful gas saver. I have a credit card and they upped my limit but I have always paid it in full each month. All bills are automatically deducted from my acct.
      There is life after bankruptcy but it is really important to pay bills on time.Let me tell you. I learned the hard way. I got a loan modification on my home.I could not control what happened but I can control what I do as regards finances now.
      I feel I have truly started over.

      • Gerri Detweiler

        Mari – Thanks for sharing your story. My condolences for your husband’s death. I hope your financial situation will continue to improve.

  • Linda

    I filed bankruptcy Sept 2005, discharged in Dec 2005.. Since then, I have not had a single late payment. I affirmed my mortgage and car loans at the time of bankruptcy. My credit card utilization is less than 1%. Currently I have a school loan, one car loan and a mortgage. I can not get my credit score above 710. Any advice???

    • Gerri Detweiler

      Linda,

      It sounds like you are doing everything right at this point. Have you used our free Credit Report Card to see what factors may be bringing down your scores? What were the results?

  • Pingback: Credit Scores: Know When to Hold ‘Em. | ComparePlastic

  • Pingback: The Recession Isn’t the Only Thing to Blame for Student Defaults |

  • Pingback: Bankrupt But Still Want to Buy a Home? There’s a Chance You Still Can | moneyrabbit.info

  • Pingback: Bankrupt But Still Want to Buy a Home? There’s a Chance You Still Can | YourRealEstateCourse.com

  • Pingback: Confessions of a debt collector | In Digest Biz

  • http://Credit.com FeliceGoldman

    My daughter has major college loan debt. We have helped pay a couple of loans,but cannot pay them all. She is working three jobs,trying to get her Spcial Ed teaching degree,and is living back home with us. She will be 27 in November and feels like she will never get out of this vicious cycle.She has negotiated some of her loan’s interest rates down,but is now considering bankruptcy.is it true that you can’t file bankruptcy on student loans? This is a nightmare for so many young adults. I think that it is a major part of the economic woes in this country.
    Young adults who went to college, should be driving this economy with homes,and consumer goods. Instead, they are drowning in debt.
    What is the best way to handle this very unfortunate situation?

    • SeanRipp

      A lot of young people borrow more money than they can realisticly pay back. I have a son in college, who recently turned 20. I moniter every penny he borrows becuase when he does receive his undergraduate in the next two years, he will have less $5000 in student loan debt. Is your daughter attending a traditional university or college or is she going to an online college. I hope she has not chose the online route because those colleges tend to be more expensive. If she has federal student loans not private student loan. She can take out a hardship forebearance or deferment. In both scenerios, she can postpone payment until her finaces are more stable.

  • John Lee

    I have a creditor that has reported my account as a charge off bad debt. Two years ago I had made an agreement with the creditors third party collection agency to pay the bad debt on a monthly basis. I have paid each month on time to the creditor, but they have not reported this, and now my credit score is sinking because of this. Is this right? I have made my payments on time and they refuse to have this changed. I had requested the creditor to please change the repoting, but they have refused. Is this right? By law are they able to do this?

    • http://www.credit.com Gerri

      John,

      Unfortunately, once an account is charged off it will be listed as a charge-off for 7 years from that date. Paying the collection agency doesn’t change the fact that it was charged off. However, it should list a zero balance since you are now paying that debt through the collection agency.

  • Jill

    2 years ago my husband & I cut up all of our credit cards and contacted each Credit Card company to come up with a reasonable monthly pay plan and close out the account. We have been doing this fine ever since as it comes directly out of our checking account. However, we have recently come into enough money to settle all of our debt for probably 50%-75% of the amount originally owed. Because we are already in “payment mode” with these companies, it cannot hurt our credit anymore to go with a settlement offer, correct? Our goal is to pay off as many as possible with the money we have.

    • Gerri Detweiler

      Jill,

      Are your credit cards reported as current now? (Paid on time?) If so, then settling them probably will hurt your scores as they will likely be reported as settled for less than the full balance, or as a partial payment. You can certainly talk with them and see whether they would be willing to settle without that, but in our experience that is typically how it works.

      That doesn’t mean you shouldn’t settle, though. If you can save several thousands of dollars that way, then is it worth the hit to your credit scores? It may be. And once you are out of debt you can save money and start to rebuild your credit. So don’t rule this option out solely based on the impact to your credit.

  • Valentine2013

    I have been debating about Freedom Debt Relief, they seem like very good people but my question comes from that I am worried about my Credit Score. Here goes I have about 7-8,000 in credit card debt eventhough its not that much I have been laid off and have been looking for work for the past year trying to have been using my savings to pay off my credit. I am finding myself not struggling to do this longer but am in a delima that I have to get a place in the future and will not qualify to Rent. How long does it stay on your credit do agencies like Lexington Law Firm are good option in rebuilding it faster?

    • Gerri Detweiler

      It definitely sounds like you are in a tough spot. Can you make minimum payments until you get a place to rent and then try to resolve your debt? In addition, it would be a good idea for you to check out credit counseling as that may allow you to lower your payments, pay your debt in full, and avoid the kind of damage to your credit that settlement will do. (I am not opposed to settlement – it can be helpful in certain situations. But it definitely will affect your credit scores for some time.)

  • Pingback: 5 Ways to Get Out of Debt: Which Will Work for You? | Consolidation Loan Advice

  • Pingback: 5 Ways To Get Out of Debt: Which Will Work for You? | Credit.com News + Advice

  • Pingback: 5 Ways to Get Out of Debt: Which Will Work for You? |

  • Pingback: 5 Ways to Get Out of Debt: Which Will Work for You? | College Info Tips

  • Pingback: 7 Signs Your Credit Card Debt Is About to Implode |

  • Pingback: 7 Signs Your Credit Card Debt Is About to Implode | DEBT RELIEF NEWS

  • Angie

    I have 14 credit cards and I will like to pay them all off and close about 3 department store card, will that have a bad affect on my credit score, as its already in bad shape.

    • Gerri Detweiler

      Paying off credit card debt won’t hurt your credit scores, and often helps. As for closing accounts, it’s impossible for us to predict exactly what will happen if you close those accounts, Since they are department store cards they probably aren’t charging you an annual fee, are they? Why not just stop using them once they are paid off? You can even cut up the plastic if you don’t want to be tempted to use them again.

  • Phill

    Hi, I’m 28 and made a lot of bad decisions with credit cards when I was younger. I’ve been able to make at least the minimum payment on time until the 4 months or so, I’ve been late on a few bills trying to adjust to a new job and pay periods. I still have about $16k in debt, and am starting to really struggle to get by each month. Last year my score was around a 740, and I’d like to salvage as much as possible, but the payments are just getting too high now that they have raises my interest rates. What is my best option to resolve this without destroying my credit score?

    • Gerri Detweiler

      Hi Phil –

      Credit is important but the most important thing is to get on solid financial footing. So as you look at your options, think hard about where you want to be in 2 – 5 years. The right option for your situation may affect your credit more than you like, but you can always start rebuilding your credit once you’ve conquered your debt.

      As far as options go, I’d recommend you start by talking with a reputable credit counseling agency – one of the options I mentioned in the story. That will give you a baseline to start with. If they can help you with DMP, it’s likely to do the least damage to your credit (with the exception of just paying the debt off) over the long run. If you/they determine a DMP isn’t feasible then you’ll know you have to look at more drastic options like negotiation or bankruptcy.

      Hope that helps!

  • http://www.knowdebt.org debt consolidation

    If you are interested in settling your credit card accounts, you may want to consider the services offered by debt settlement firms. Some professional firms can provide the experience and knowledge many consumers lack when trying to negotiate with their creditors on their own.

  • http://www.knowdebt.org debt consolidation

    credit counseling agency for a consultation doesn’t impact your credit at all since the fact that you’ve sought help is not reported to the credit reporting agency. If you enroll you in a Debt Management Plan, where you make one monthly payment to the counseling agency and it disburses payments to your creditors, however, it can affect your credit in several ways.

  • http://NoMoreCreditCards/debt-settlement/ Ruth Adorno

    Here is how I look at it. If a person has maxed out credit card debt, where they are paying only minimum payments, this is not a strategy to pay off debt or to have good credit.
    Option One – They can double up on their minimum payments, where that will often have them out of debt in around three years, verse ten years when paying only minimum payments. This option is the best option as far as your credit score is concerned.

    If doubling up on your minimum payments is not possible, then I would recommend at least entertaining a debt relief option. Sure it may impact your credit report negatively, but you will be out of debt in three years or even faster.

    Lets pretend that your credit score goes down by 150 points after joining on a debt settlement program, but you are debt free in 30 months. Once you graduate the program, you immediately start on path to rebuilding your credit score. You can raise your credit score by more than 100 points in 18 months. I have seen it happen over and over again.

    So you graduate the debt settlement program by two in half years, and by 18 months later, your credit score could be right back up to where it was.

    The difference would be that you are debt free.

    To build your credit fast simply:

    - Get a secured credit card where you will not get denied
    - Pay on that for 6-12 months, where you will then be approved for an unsecured card
    - Use your card each month, but pay the bill off in full when it arrives
    - Have good payment history, work to increase credit limits, have a good mixture of accounts including secured and unsecured accounts, and you will increase your credit score no matter how bad your past was.

    Each person has a different situation. Start by speaking with a counselor at a non profit debt consolidation company or at a debt settlement company that is highly rated with the BBB. The BBB is actually a great starting place where consumers can find safe companies to at least get free consultations from.

  • Kevin

    Hello i am 29 i have 3 credit cards all with a balance totaling about $28k. I have had the cards long term and never missed a payment or late on a payment the interest is the lowest they offer at 12.9%. I always make at least the minimum payment, mostly double or even more but it seems they are taking forever to pay off. Talked to a debt settlement company’ which seemed very high pressure into getting me to sign up with them assuring me this was the best route sounded to good to be true so i decided now to go with them. Also spoke with a credit counselling society, they offered to put me in a debt management program which would bring all the cards down to 0% interest and have them all payed off with one monthly payment in 5 years. My concern with this is I would not be able to purchase a home or finance anything for a long time. I have good credit just high debt ratio also have a mortgage for 4 years in good standing and many car loans paid off through the years. What do you think my best option is to pay down this unsecured debt faster and be debt free? Applied for a debt consolidation loan through my bank was not approved because my income was to low last year (self-employed) and cannot borrow from my home equity because they changed the mortgage rules here in BC this year.

    • Gerri Detweiler

      Kevin – Let’s look at it this way. You’re paying roughly $3600 a year in interest on that debt. Over five years that’s a little over $18,000. The counseling agency can get that down to 0 (you won’t even find a debt consolidation loan for that rate) and you’ll be debt-free at the end of those five years. The damage to your credit won’t be anywhere near what it would be with debt settlement.

      My concern with this is I would not be able to purchase a home or finance anything for a long time.

      I doubt that would be the case. The main impact will be from closing those accounts. FICO doesn’t take into account that you are in credit counseling when calculating your credit score. In other words, you don’t get penalized specifically for credit counseling like you would for, say, a late payment or bankruptcy. Plus you’ll hopefully be learning how to live debt free so you don’t have to rely on credit cards again.

      Generally my view is if you can afford to pay your debt through a DMP, go for it. But if the payment plan they are proposing is a stretch and you’re not sure that you can keep up with those monthly payments, then consider settlement or bankruptcy. Of course, it’s impossible for me to say exactly what you should do since I don’t know your entire financial situation, but I wouldn’t rule it out for fear of the impact on your credit.

      Having said all this, I don’t know the details of how the credit system works in Canada. My comments are based on those who live in the US.

  • debt

    Here is how I look at it. If a person has maxed out credit card debt, where they are paying only minimum payments, this is not a strategy to pay off debt or to have good credit.
    Option One – They can double up on their minimum payments, where that will often have them out of debt in around three years, verse ten years when paying only minimum payments. This option is the best option as far as your credit score is concerned.
    If doubling up on your minimum payments is not possible, then I would recommend at least entertaining a debt relief option. Sure it may impact your credit report negatively, but you will be out of debt in three years or even faster.
    Lets pretend that your credit score goes down by 150 points after joining on a debt settlement program, but you are debt free in 30 months. Once you graduate the program, you immediately start on path to rebuilding your credit score. You can raise your credit score by more than 100 points in 18 months. I have seen it happen over and over again.
    So you graduate the debt settlement program by two in half years, and by 18 months later, your credit score could be right back up to where it was.
    The difference would be that you are debt free.
    To build your credit fast simply:
    - Get a secured credit card where you will not get denied
    - Pay on that for 6-12 months, where you will then be approved for an unsecured card
    - Use your card each month, but pay the bill off in full when it arrives
    - Have good payment history, work to increase credit limits, have a good mixture of accounts including secured and unsecured accounts, and you will increase your credit score no matter how bad your past was.
    Each person has a different situation. Start by speaking with a counselor at a non profit debt consolidation company or at a debt settlement company that is highly rated with the BBB. The BBB is actually a great starting place where consumers can find safe companies to at least get free consultations from.

  • Angry Fan

    Does anyone know the impact Defaulting on Season tickets will have on ones credit? Will it have an impact on my car insurance, current loans for cars, or anything else. If anyone is aware of this please let me know.

    Angry Fan

    • Credit.com

      Hi Angry – This is a great question and one that we may be covering in a future story with a more in-depth look at how sports teams manage season ticket holder accounts. Out of curiosity, which team were the season tickets for? We may be able to reach out to them for comment about how they handle collection proceedings with defaulted ticket holders.

      To answer your question, though, how defaulting on season tickets would impact your credit would depend on whether or not the organization/team reports the incident/account to the credit reporting agencies. If they report the incident as a collection it will have a negative impact on credit standing and hurt your credit score. It won’t impact current accounts but if the impact is significant and your credit score takes a severe hit, it could impact future loans, their interest rates and your ability to qualify for them.

      For a closer look at how a collection can impact your credit, including a list of resources on how to handle a collection, this article is a good place to start: http://blog.credit.com/2013/04/a-debt-collector-came-after-me-for-8-97/

      • lisa

        i’m i the freedom dept relief program after i pay off all my dept how long does it stay on you credit report

  • Howard

    I am 37 and have amassed $45,000 in credit card debt (over three cards). I have student loans, a mortgage loan, and an equity line of credit. I have never been late with any payments. However, I am a bit stressed with the high credit card debt. Would it be wise to file for chapter 7 on the credit card debt only while keeping my mortgage, equity line of credit, and student loan payments?

    • Credit.com

      Howard – The problem with Chapter 7s is that you must meet minimum income requirements (based on the minimum income threshold in your state). This means there’s a possibility that you may not qualify for a Chapter 7, so it may not be an option for wiping out credit card debt. Before you decide to go the bankruptcy route, have you considered a Debt Management Program? I know 45k is an huge burden and it’s stressful, but there are other options that may help. Before you decide on bankruptcy, we’d advise exploring all of your options. It’s worth contacting a consumer credit counseling service. They’ll be able to review your individual personal financial situation and debt load to determine whether or not you’d be a good candidate for a DMP. If you are a good fit, they’ll work with your creditors to lower you interest rate and lower your monthly payments to one monthly payment you can afford. If a DMP isn’t a good fit, and bankruptcy is your best option — they’ll be able to tell you that as well. A consultation is free, but make sure you choose a consumer credit counseling service that is accredited by the National Foundation for Consumer Credit Counseling.

      CredAbility.org, formerly CCCS of Greater Atlanta, is a great one. They help consumers all over the US so you don’t need to be in the Atlanta area to reach out to them. You can find them online or by calling 1.800.251.2227 to speak to someone for a free consultation.

      For more information on debt relief issues, here are two resources that should help:
      1. Is a Debt Management Plan Right for You?

      2. How to Avoid a Debt Spiral

  • Pingback: Definitive Guide to a Debt Free Life - Chapter 5: How Debt Affects Credit - Project Debt Relief

  • http://www.credit.com/ Credit.com Credit Experts

    We would suggest talking with a credit counselor. You don’t say your income, but with many credit obligations (house, car, credit cards) and little savings, you and your family would be tremendously at risk if your income decreased. You need advice from an objective party who sees your entire financial situation.

  • http://www.credit.com/ Credit.com Credit Experts

    We’re sorry, we can’t give individual advice. Your best bet is to consult a credit counselor or financial planner for help in making the decision best for you.

Find out where you stand.
Get your FREE personalized credit report card.

Sign Up Now
X

Stay connected to our experts

Please submit your email address to get credit & money tips & advice
from our team of 30+ experts, delivered weekly to your inbox.