Having too much debt is never a good thing. This doesn’t mean that pursuing debt relief won’t have an impact on your credit score. Some actions related to lowering your debt will increase your credit score. Other actions will serve to lower your credit score. This is why it is so important to consider all the consequences before embarking on any debt relief crusade.
How Lenders View Your Credit Score
Most lenders consider any credit score above 620 to be a decent credit risk. Credit scores between 700-720 are considered average. Anything above this level is going to be considered good to excellent.
Different credit agencies are going to view your credit score differently. For example, TransUnion says a credit score of 730 is considered close to excellent. However, Fair Isaac only views a credit score of above 760 as truly excellent. Equifax will consider your credit to be excellent with anything over 740. Fortunately, most credit agencies are fairly consistent with 620 being the bottom limit for loan approval.
Why This Matters To You
It is important to know where you stand with your credit score. Knowing where you want to keep your credit score will help you make good decisions while you pursue debt relief.
Say you wanted to pursue a debt settlement because you cannot keep up with your payments. Just missing a payment or two could cost you 100-200 points off your credit score. Settling with a debt relief service won’t hurt your actual score. However, lenders will view this as a bankruptcy. You will be treated as if your score was 100 or more points lower.
On the other hand, say you used a home equity loan to pay off credit card debt. Your score will go up about 50 points just for paying off your credit card balance. You may also benefit because you are making installment payments as opposed to revolving credit. Lenders find this type of debt to be less burdensome to a borrower.
A borrower who started out with a score of 730 before opting for a debt settlement could see their score drop to at least 630. This person will have to work hard to repair their credit to get good rates on future loans. Let’s say the borrower in the second scenario started with a credit score of 650. Cleaning up that credit debt with an equity loan raises that score to 700. Borrower two winds up with a better credit score even though he started with a lower score.
How Your Actions Impact Your Credit Long Term
Creditors have access to all credit activity for the past seven years. This means a debt settlement eight years ago won’t hurt you. However, some bankruptcies stay on your credit report for a decade. On the surface, debt settlement may be better than bankruptcy.
What you have to consider is how a particular action allows you to rebuild credit moving forward. Will a bankruptcy allow you to start paying debts on time again? A timely payment history over the past year or two means more than what happens immediately after you go bankrupt.
Never cancel a credit card once you have paid it off. Keeping old credit accounts open will increase your average account age. Those who have had accounts open for a long period of time will generally have better credit scores.
How debt relief impacts your credit score depends on many factors. You have to consider your credit score when starting on the path to debt relief first and foremost. Those with good credit scores will lose more by missing payments or by using a debt relief service. Conversely, they also have more options to relieve their debt. Knowing how each lender views a particular score will also be an important part of your strategy. See what debt relief plan will work best for you. Call right now to talk to a debt relief professional who can help you today.