When you are deep in debt, your credit score is likely the last thing on your mind. Working to make your repayments while also providing for your family can take up all of your attention.
To help you get out of debt, there are a number of options available, and each affects your credit rating differently.
When considering various debt relief options, it is important to consider not just the short-term help they might provide, but also the long-term effects on your credit rating.
Here’s what you need to know.
Credit Score Basics
Your credit score, or credit rating, represents a combination of a number of factors that evaluate your creditworthiness.
Lenders use this score to determine your interest rate, whether or not they will lend to you and how much they will offer.
Your credit rating takes into account the amount of debt you are currently carrying, how frequently you apply for credit and how well you manage that debt as indicated by your payment history.
Keeping your total amount of debt low and always making your monthly repayments on time will keep your credit score high.
Debt Relief Options
If you haven’t managed your debt well, you could find yourself drowning under far too many repayments each month.
Fortunately, debt relief methods can help you get a handle on your debts, but you’ll need to consider how each method will affect your credit rating over time.
Here’s an overview of some of the most common strategies.
Budgeting won’t have a direct impact on your credit score, but it can help you get your debts under control, which may allow you to improve your credit score over time.
Start by making a list of all of your monthly repayments and their amounts, as well as any additional bills you have each month, such as school tuition, utilities, groceries and other expenses.
It’s far easier to meet your obligations when you have a clear picture of what they are.
As with budgeting, seeking financial advice won’t directly affect your credit rating.
However, getting free financial advice can help you formulate a strategy for repaying your debts while also sticking to your budget, which can improve your credit score over time.
Be sure to seek advice from reliable sources, and always attempt to verify the information you find for accuracy.
Debt Management Plans
A debt management plan is an agreement between you and your creditor. While not a formal agreement, it can help relieve some of the pressure on you by reducing your monthly repayment or lowering your interest rate.
This is a private arrangement between you and your creditor, so it won’t directly impact your score.
However, paying off your debts in smaller amounts over a longer period may mean that it takes you longer to get out of debt, which can keep your credit score low for a longer period.
Debt Consolidation Loans
A debt consolidation loan pays off all of your existing debts to combine them into a single loan. This can streamline your monthly repayments and reduce your interest rate.
Because you are taking out a sizeable loan, your credit rating will likely take an immediate hit, as you are increasing your total amount of debt temporarily.
However, this effect will go away relatively quickly once it is reported that your other debts have been paid off, and your score will continue to improve as you make your regular repayments on time.
In a Debt Agreement, you’ll come to an arrangement with all of your creditors, often agreeing that your debts to be reduced in exchange for making large payments up front.
This agreement will be reported in your credit file and will typically stay there for at least five years, so this isn’t a decision you should take lightly.
If you renege on a Debt Agreement, your creditors can petition to the court to require you to declare bankruptcy, so you’ll need to be sure you can comply with the terms.
Personal Insolvency Agreements
A Personal Insolvency Agreement is the last step available to you before declaring bankruptcy.
It’s similar to a Debt Agreement in that you’ll make arrangements with all of your creditors in order to find a mutually acceptable path.
However, in addition to being reported in your credit file, the agreement will also be reported in the National Personal Insolvency Index, where creditors will be able to view it for all time.
This information will remain in your credit file for at least five years, and will continue to damage your credit score during this time.
Bankruptcy should only be used as a last resort, as this is the most serious option for debt relief, requiring you to admit that you are fully unable to repay your debts.
In bankruptcy, your assets, including your home, car and business, can be sold to cover your debts, which can impact your lifestyle, making it harder to work and live.
In addition, the bankruptcy will be noted in your credit file for 10 years, which can make it difficult to obtain financing in the future when you need it, even when you are back on solid ground financially.
Evaluating the Impact of Debt Relief on Your Credit Score
While many debt relief options can negatively impact your credit score, that doesn’t mean that you shouldn’t consider them.
Depending on your specific situation, it can be worth lowering your score temporarily if it means helping you get out of debt permanently.
The experts here at Debt Negotiators can provide you with free financial advice to help you choose the most appropriate option to meet your needs.
Enquire today to get started on the road to being debt-free!