Does Debt Relief Hurt Your Credit? 

How Debt Relief Affects Credit Scores 

There are several types of debt relief, and each has the potential to significantly affect your credit score. Some types, such as debt management plans (DMPs) are likely to improve your credit rating if you stick to the plan. Other options, such as debt settlement and bankruptcy, have more complex effects. That’s why it’s crucial to investigate all the options when deciding on a debt relief plan. 

What Is a Credit Score? 

A credit score is used by lenders to assess how creditworthy potential borrowers are. When you apply for a financial product such as a loan or credit card, lenders check your credit score for information on how promptly you’ve paid debts in the past, whether you miss payments, and how much total debt you have. This helps them decide whether to lend to you, and what the terms should be. 

There are several types of credit scores used in the U.S., including FICO (formerly the Fair Isaac Corporation) and VantageScore. Each has various scoring models which use slightly different criteria, but they all use information collected by credit bureaus to assess consumers' creditworthiness. Every adult is given a score, usually between 300 and 850, with higher number indicating higher creditworthiness. 

FICO scores are the most widely used in the U.S. right now. The score is made up of the following parts: 

Aspect	Description	Weight in FICO Score
Payment History	Tracks whether you’ve paid bills on time. Includes late or missed payments, bankruptcies, foreclosures, and accounts sent to debt collection.	35%
Amounts Owed	Measures the total amount of debt and how much of your available credit you are using (credit utilization ratio).	30%
Length of Credit History	Considers how long your credit accounts have been active. Longer histories provide lenders with more data and typically improve scores.	15%
New Credit	Accounts for how often you apply for new lines of credit. Includes hard credit inquiries and records of newly opened accounts.	10%
Credit Mix	Evaluates the variety of credit types you use, such as credit cards, personal loans, auto loans, and mortgages.	10%

Table: Weight in FICO score

Note: Illustration/Pie chart of the parts of the credit score 

How Much Does Debt Relief Hurt Your Credit?

How much debt relief hurts your credit depends on the type of relief you use. Understanding the consequences of each type of debt relief is key to making the choice that suits you best. Debt relief has the potential to hurt or heal — sometimes both — your credit score, depending on how you use it and your situation. 

Debt Management

Debt management plans are one of the safest debt relief options for your credit score. With debt management, you work with a credit counselor who negotiates with your creditors to agree a repayment plan that fits your budget. The debt counselor will perform a soft credit enquiry to check your credit score, which won’t affect your score at all. 

If you stick to the plan and make the agreed monthly payments, this method of debt relief will not harm your credit score. In fact, keeping up the regular payments over several months or years could improve your credit score. However, if you don’t keep up with the repayments or quit the program, your credit score could suffer. 

How long do the effects Last?

If you make the monthly payments on time, debt management should increase your payment history rating and gradually improve your overall score. If you miss payments, your payment history may be affected for up to 7 years. 

Debt Consolidation

A debt consolidation loan (link) can positively and negatively affect your credit score, depending on how you manage it. With a debt consolidation loan, your debts are combined under one lender, so you only need to make one monthly payment. Because it is a loan, checking your eligibility usually requires a hard credit inquiry, which will likely have a small, short-lived impact on your credit score. 

As with debt management, debt consolidation shouldn’t hurt your credit score if you make your payments in full and on time. But because it is a loan, checking your eligibility usually requires a hard credit inquiry, which will likely have a small, short-lived impact on your credit score. 

How long do the effects Last?

Because a debt consolidation loan requires a hard credit inquiry, your score will take a small hit which will stay on your record for 2 years. Opening the new account and potentially closing older accounts during consolidation may affect your average account age, which could affect your score for up to 7 years and stay on your record for ten. 

Debt Settlement 

Debt settlement can have a significant negative impact on your credit score. With debt settlement, you hire a company to negotiate with your creditors with the aim of getting them to write off some or all the debt.  

The downside is that while this is happening, debt settlement companies will require you to stop making payments to your creditors. Because payment history makes up such a big part of credit scores, stopping payments can cause damage. That’s why debt settlement is something of a last resort when it comes to debt relief. 

How long do the effects Last?

Settling debts usually involves stopping payments to creditors while the new agreement is negotiated. This means that your payment history will suffer, as late or missed payments stay on your credit report and affect your score for 7 years. Any closed accounts will also affect your score for 7 years.

Bankruptcy 

Bankruptcy significantly affects your credit score and will make it difficult to get credit in the future. It is a last-resort option for when other methods of debt relief have failed. There are a few types of bankruptcy, suitable for different kinds of debt problems. 

Although bankruptcy has serious consequences for your credit score, it gives you the opportunity to start over and nurture your credit rating back to health. 

How long do the effects Last?

Bankruptcy has the longest-lasting effects of all the debt relief options. Depending on the type of bankruptcy, it will remain on your credit record and affect your score for 7-10 years. After this, however, you’re left with a clean slate and can build your credit score back up. 

Debt Relief Option	Impact on Credit Score	How Long the Effects Last
Debt Management	Minimal impact if payments are made on time; could improve score over time. Missing payments or quitting the program could harm your score.	Missed payments may affect your score for up to 7 years. On-time payments can gradually improve your score.
Debt Consolidation	Hard credit inquiry causes a small, short-lived score dip. Opening a new account or closing old ones may lower the average account age and impact your score.	Hard inquiry stays on your record for 2 years. Effects of account changes can last up to 7 years, on record for 10 years.
Debt Settlement	Significant negative impact due to missed payments during negotiation. Settled accounts are reported as “settled” rather than “paid in full.”	Late or missed payments affect your score for up to 7 years. Settled accounts also stay on record for 7 years.
Bankruptcy	Severely damages credit score and makes it difficult to obtain future credit. Offers a chance to rebuild credit after completion.	Remains on your credit report for 7-10 years, depending on the type of bankruptcy. Afterward, you can rebuild your score.

Table: Types of debt relief and their effects 

Is Debt Relief the Right Choice for You? 

Debt relief exists for a reason. If you’re struggling with debts, using debt relief wisely can help you to get back on your financial feet. Although your credit score might take a hit, the important thing is that you get to a better place financially where you feel on top of the situation.  

With all types of debt relief, any negative effects on your credit score are temporary. Even if they stay on your credit report for years, they eventually get removed and your score can recover. Paying off debt with debt relief plans can be tough at the start, but if you stick to the plan, it is an effective way to get your finances back on track and improve your credit score. 

Because debt relief plans can take several years to complete, if you’re not ready to make a long-term commitment it would be better to explore other options, such as DIY debt management. If you enroll on a debt relief program and then miss payments, your credit score will suffer. 

Alternatives to Debt Relief  

Debt relief isn’t always the best route to take for paying off debts. If you’re concerned about your credit score or simply want to explore other options, here are three ideas to try. 

Explore free credit counseling 

Credit counseling is a great optionif you want to get your finances under control and explore debt relief that doesn't hurt your credit. A credit counselor will help you assess your financial situation and give advice on what you can do to improve it including help with budgeting, saving, and debt management options. 

There are many credit counseling agencies out there, some of which offer free advice while some come with a charge. Make sure to check out all your options to find the best counselor for you. Always choose a counselor who is accredited by a reputable body such as the National Foundation for Credit Counseling (NFCC).  

Consider balance transfers 

A balance transfer is when you pay off one or more debts by opening a new line of credit with a lower interest rate, usually a credit card or personal loan. The lower interest rate means you should pay less than you would have before, and when you make the monthly repayments on time, you’ll be having a positive impact on your credit score. 

With careful research, this can be an effective way to reduce debts and pay them off faster, but it is important to check the details before opening any new line of credit. Credit cards often have introductory offers with low interest rates, but these usually rise after a year or so. Always make sure that the new deal is better than the old one. 

Negotiate with your creditors on your own 

With debt management, debt consolidation, and debt settlement, third parties negotiate on your behalf. It is possible to cut out the middleman and negotiate directly with creditors, with the aim of reducing monthly payments or the total amount owed. How successful this will be will depend on the creditor and the situation. 

Depending on the outcome of the negotiations, you may be able to make an agreement that makes it easier for you to make monthly repayments, which could help to improve your credit score. However, debt settlements and hard enquiries will still stay on your record and negatively affect your score.