The Four Worst Things You Can Do For Your Credit
I think at least once in every person's life (except those lucky few that are financially endowed enough to avoid debt all together), they have to struggle with debt. For some, that means cutting back on their normal expenditures to make their monthly payments. For others in more financial hardship, it may mean finding another solution. There are many promising debt solutions in the world and one search through google will tell you that (currently returning 16,000,000 pages for "debt settlement"). However, before you decide which one is right for you, you should understand what each one has to offer and their disadvantages. This article discusses five different debt relief options and gives my opinion on why four of them are the absolute worst things you could do for you credit score.
Debt CounselingDebt counseling is a service where individuals pay for advice on what to do with their current debt situation. They help you on your budget, tips on avoiding certain debt pitfalls, and even help you develop a long-term debt reduction plan. Sounds like a nice service, right? Well... yes and no. First of all, lets be honest with ourselves. Are we really in this situation because we really don't know how to pay our debts back? My guess is no. More than likely it is either a) We simply cannot afford it at the time or b) We choose not to. Now, unless you are looking for an accountability buddy and want to pay up front and then again on the back end when your credit suffers than you may like this option. This is also a way for many credit card companies to disguise their collection techniques.
How does Debt Counseling effect your credit?Where or not you are behind on your payments, this is reported to the credit agencies and demonstrates your inability to take care of your own affairs therefore effecting your credit worthiness for 7 to 10 years. In other words, it will go on your credit report that you needed an accountability buddy just to help make your payments and were willing to pay for that. If I were a lender, I would note this is a red flag and proceed with caution.
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Debt ConsolidationDebt consolidation is a very popular option for people struggling with debt. This is largely impart due to sneaky credit card companies and eager mortgage brokers. Both make it seem like you are getting a better deal than you really are. In some cases, you will be better off than before. Debt consolidation is when you take out a loan to cover your other loans and pay those off with this new loan. You then make one monthly payment on one loan at a fixed rate. Done on your own, this may be a good option for people with good enough credit to get a loan at the size they need. However, going through a consolidation firm can also have long-term effects on your credit.
How does Debt Consolidation effect your credit?Any time you take out a loan or spend money on a credit card, your credit score is going to initially suffer as your Debt-to-Income ratio will have gone up along with your risk grade. Furthermore, if you are using a debt consolidation agency, this is reported to the credit agencies as you were not able to handle your own affairs and will dramatically effect your credit worthiness. This also has a 7 to 10 year effect on your credit and does not save you any money. Additionally, many of the consolidation firms are nothing more than another way for credit card companies to disguise their attempts to collect.
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Filing for BankruptcyNo matter what you have heard, this should only be considered as a last resort. If you can find another way out, pursue it because bankruptcy can ruin you. It is also much harder to file for with the modern laws and attorneys charge exuberant fees. There are two popular types of personal bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization).
Chapter 7 Bankruptcy is when much of your non-exempt property is sold to pay off as much of your debt as possible. This will essentially clear you of your unsecured debts. There are strict rules on who can qualify for Chapter 7.
Chapter 13 Bankruptcy is also called "wage-earner" bankruptcy. It is when you submit a new payoff plan for your current debts to be paid off over the next 3 - 5 years.
How does Bankruptcy effect your credit?The fact that you filed for bankruptcy will be on your credit for 7 to 10 years and will demonstrate that you are not credit worthy. Most lenders are not compensated fully for loans that were settled through bankruptcy and therefore are very cautious about lending to anyone that has a bankruptcy on their credit report. Also, most applications for any type of credit ask if you have ever filed for bankruptcy and no doubt consider that in their decision.
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Doing NothingAlthough it may seem obvious, many people choose this option. By doing nothing you will undoubtedly be drowning in debt and destroy your credit. You will be harassed by debt collectors and possibly sued. Eventually, you will end up choosing one of these debt relief programs or risk losing everything.
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So what is a better option? - Debt Settlement Debt settlement also called debt negotiation is not the best option for everyone. If you are already making your payments on time and can continue to do so then that is your best option. Debt settlement is the process by which a debt settlement agency negotiates with your creditors to lower the overall debt amount and in return pay the new amount as a lump sum. This can save you 50-60% up front plus the interest you don't have to pay. Debt settlement will not be a gold star on your credit report. However, it does have several advantages. You will save a significant amount of money as the whole point of debt negotiation is to lower your overall debt.
How does Debt Settlement effect your credit?While you are in the Debt Settlement Program your credit score will suffer because you will not be making your normal monthly payments (if you were then the creditors have no reason to negotiate with you). However, after you have paid off your creditors depending on the company your credit report may show "paid-in-full" or "settled". Neither have much effect anymore in the lending world but it is always better to have it say "paid-in-full" and it is especially good when there is no sign of 3rd party help. There are some debt settlement companies out there that do not report to the credit bureaus allowing you the best chance to re-establish your credit. Because of this, you can have your credit back in good shape within 6 - 18 months.
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