Credit Solutions

If you have too much debt, there are at least three credit-solution strategies you can use:  debt consolidation, debt settlement and bankruptcy.

Any one of these can get you out of debt when used properly, but each has very different effects on your wallet and your credit report:

Credit solutions affect credit reports and credit scores differently. These effects may not be entirely predictable, since they rely on your unique situation

Debt Settlement and Your Credit

With a successful debt settlement, your total debt goes down. The process can help you free up some funds, putting you in a better position to repay other outstanding debts. The precise effect on your credit varies widely and depends on the rest of your credit history.

By making regular, timely payments to your other accounts, you can help bring your score up over time.

Debt Consolidation and Your Credit

Debt consolidation itself should not have a significant impact on your credit report. Ultimately, the effects depend on you.  Making consistent payments on the consolidated loan will improve your credit score over time, while late payments will bring it down.

Consider debt consolidation as a tool to help you get back on track with your finances. This strategy basically changes the shape of your debts but does not change their substance. You still owe the same amount of money, but now you have an easier way to repay it.

Bankruptcy and Your Credit

Bankruptcy can lower your credit score by up to several hundred points, and it typically stays on your credit report for a full decade.

This option has a larger effect on individuals with higher credit scores. Keep in mind that your credit score signifies to lenders how likely you are to repay your loans. People with lower credit scores already were considered risky before they filed for bankruptcy.

It is rarer, and therefore more telling, when individuals with better credit declare bankruptcy, so their scores drop the most. These individuals also need the most time to fix their scores after a bankruptcy, as the chart below shows:

Starting score Estimated score after bankruptcy Years to recover
780 540-560 7-10
680 530-550 5

Remember that if you choose to file for bankruptcy, you still may be responsible for certain debts, such as student loans, fines or child support.

Tips for Resolving Debt

If you’re working to pay off your loans, keep these basic tips in mind:
  • Create a budget, and stick to it. List all your income and all your expenses, then decide whether your income could be used more effectively.
  • Contact creditors if you find you cannot meet your payments. You may be able to arrange a modified payment plan.
  • Work out your total debt. List how much you owe, along with interest rates and minimum payments. This will help you plan and prioritize your spending.
  • Create a repayment plan, and figure out when you can expect to finish paying off your debt.
  • Do not take on additional debt. Paying off one debt will not help if you accumulate further debts in the meantime.
  • Identify those debts with the highest interest rates, and pay off those first. This will reduce the overall amount you have to pay.

In considering your financial options, remember that your actions today can stay with you for years. Seek the help of a credit counselor if you are unsure of what step to take next.

After you’ve chosen a path, follow through on the plan and get out of debt. After that, make every effort to stay debt-free. Some of the tips above can help you maintain your finances over the long term and avoid further credit problems.

Al Krulick

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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