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Does debt relief hurt your credit score?

If it's getting difficult to make your minimum payments, you may be considering debt relief. But do debt relief services hurt your credit? Getty Images

If you're struggling with credit card debt, you may feel like you're in a trap that could last a lifetime. After all, credit cards usually come with high interest — interest that seems to be the primary focus of most minimum payment calculations. So, it's likely that when you make your payments, only a small portion of the money you send actually goes toward paying your debt off

If you're tired of the figurative revolving door that is credit card debt and you're ready to make a change, you should know that debt relief services can help. But what are the ramifications of signing up for one? In particular, does debt relief hurt your credit score? That's what we will explore below.

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Does debt relief hurt your credit score?

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose. 

  • Debt consolidation: If you take the debt consolidation route, your lenders are likely to close your credit cards. That means if you have available credit on your accounts, that credit will be wiped out — resulting in a higher credit utilization ratio. However, if you've already tapped out your credit limits there will probably be little to no impact on your credit score. In either case, your credit score is likely to improve as you will presumably make on-time payments in the debt consolidation program.  
  • Debt settlement: Debt settlement involves foregoing minimum payments to your lenders as you save to settle your debts. This can have a significantly negative impact on your credit score, but may still be worth the relief.  

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What to think about when you're struggling to make payments

While you should always remain vigilant about your credit, there are other factors to consider when dealing with overwhelming credit card debt. This includes: 

Your credit has probably already taken a hit

If you're having a hard time making your minimum payments, there's a high likelihood that your credit isn't perfect. Here's why: 

  • Credit utilization: If your balances are anywhere near your credit limits, you likely have a high debt-to-credit ratio. This usually leads to a poor credit utilization score. 
  • High debt-to-income ratio: If you're struggling to make your minimum payments, you probably have a high debt-to-income ratio. This can hurt your credit score and limit the amount of money lenders are willing to let you borrow. 
  • Missed payments: You may have had no choice but to miss payments from time to time. Missed payments typically have a negative impact on credit scores.  

You could deal with poor credit for longer without debt relief

If you continue down the same path with your credit card debt, there's a minimal likelihood that you'll see improvement in your credit utilization or debt-to-income ratio any time soon — and the occasional missed payment may continue. That means you may end up dealing with poor credit for significantly longer if you do nothing than you would if you sign up for debt relief. 

Most debt relief programs will help you clear your debt within three or four years — and do so with lower payments that are easier to make each month. Sure, your credit score may take a hit in the beginning, but in the long run, you can end the program with a clean financial slate — making it possible for you to build a positive credit score in the foreseeable future. 

The bottom line

Your credit score is important — and debt relief services may cause it to fall. But if your score has already been damaged by a series of poor financial habits it may be worth a temporary hit with debt relief now to improve your creditworthiness long-term. Only you will be able to determine the best path forward. In many cases, it may be better to tap into the debt relief you need now and work to rebuild your credit once you have a clean financial foundation to build upon.

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