The primary goal of debt consolidation, debt settlement, or credit counseling is formulating a realistic payment schedule that reduces your total debt load. Often, however, the tactics that are used focus mainly on relieving debt while neglecting credit repair.
Granted, most of the tactics are designed to solve immediate needs such as stopping threatening phone calls, preventing lawsuits, and setting affordable monthly payments. Nevertheless, the ideal solution is one that protects you in both the short and long term: a plan with workable payments that simultaneously builds up your credit score. So how do you do that?
Don’t Cut Up Credit Cards Hoping to Increase Your Credit Score
Some high-profile personal finance pundits like Dave Ramsey recommend cutting up your credit cards and going on an all-cash basis. While canceling the cards may help you rein in your spending in the short term, it is not likely to help your credit score. According to The Motley Fool, closing an account does not make its record disappear from your credit report, and doing so may well hurt your score by negatively affecting the ratio of balance to available credit.
The best strategy, if you can resist the temptation to use the cards, is to keep them, preserve the open credit line, and pay down the bills. Don’t use the cards until you’re back on an even keel. By keeping those cards active, you will see an immediate positive impact on your credit score when you have paid off your debts.
How a Creditor Reports a Settlement Determines Its Impact on Your Credit Score
A very effective way of getting debt under control is debt settlement. A New York Times report noted that credit card companies are now settling balances for less than the amount due with great frequency; they are even allowing their customer-facing agents to negotiate directly with consumers.
But how the credit card company reports your settlement to the credit reporting agencies determines what kind of impact it has on your credit score. When you make a settlement agreement for less than the amount due, credit card companies may not report the bill as simply “paid.” It is more likely that they will report it as “settled for less than the full amount due,” and the negative payment history will remain on your record for years. This type of settlement process frees you from the debt but lowers your credit score. When negotiating for a settlement, find out specifically how that settlement will be reported and attempt to negotiate the wording in your favor.
The “Pay for Delete” Approach Can Improve Your Credit Rating
Credit repair experts often advocate the “pay for delete” option as a way to address debt while improving your credit at the same time. Using this strategy, you obtain a written agreement from a creditor under which you pay a settlement amount, the creditor agrees to take that payment and not pursue the balance, and then deletes the record from your credit report. It is not as common as some credit repair people claim, but it does happen, and it is legal.
However, you will need to be very persistent if you follow this strategy. First, you may need to talk to more than one person from your credit card company or collection agency before you get any cooperation. Second, once the creditor has been paid off, you often have to stay on them to make sure the report is actually removed. Keep records of all verbal communication and copies of all written correspondence with the company until the report has been deleted.
Be Thorough, Verify & Follow Through to Protect Your Credit Score
Combining a debt relief strategy with aggressive credit repair takes diligence. With every step, consider the credit impact of every action you take, and verify all positive actions are being noted on your credit report. Do not trust a creditor to do what they say they will do. Make sure collection agents and credit card companies follow through with any promises to delete or update records in your favor. And finally, obtain copies of your credit reports on a regular basis and check for mistakes.
Start boosting your credit score today – get more information on strategies that can help you recover from a low credit score.