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:
- Debt Settlement: This is when you negotiate with creditors to reduce the total amount of money you owe. Often, consumers hire a debt-resolution company to negotiate on their behalf.
- Debt Consolidation: This process involves combining all of your debts into one larger debt. Then you can set up a payment plan and work toward paying off the entire amount.
- Bankruptcy: This is the last resort. The process may allow you to wipe out all of your debts, but your credit will be damaged. The hit can last up to 10 years.
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|
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.