The length of time debt relief stays on your credit report depends on the type you use. Most negative items, including debt settlement, stay on your report for up to seven years. But the start time can vary depending on your situation.
What Is Debt Relief?
Debt relief is typically used as another term for settling your debt. That means negotiating with your creditors to lower your outstanding balances and pay them off for a lower amount. This debt payoff strategy is typically reserved for people with large amounts of debt who are struggling with payments and can’t foresee the ability to pay off their balances in the future.
While getting some of your debt wiped out seems like a great plan, there’s a large degree of risk involved, and you’ll also do damage to your credit score.
How Debt Relief Works
There are private companies that offer debt settlement services, but they charge expensive fees and recommend risky strategies while negotiating. Here’s how the process typically works:
• A debt settlement company may tell you to pause payments on your credit cards. This causes late fees, penalties, and interest to accrue, not to mention major damage to your credit report.
• In the meantime, you deposit the money you would have paid into a savings account. You may not use your credit cards during this time.
• The debt settlement company eventually reaches out to your creditors and offers to pay them a settled amount using the funds you saved.
There is no guarantee that your creditors will agree to the settlement. You also have to pay the debt relief company a fee, usually either based on how much you saved or how much you settled. And if you do have any debts discharged, that amount is typically considered taxable income.
Types of Debt Relief Options
There are a few different debt relief options other than debt settlement:
• Credit counseling: Work with a nonprofit counselor to review your finances and help create a payoff plan for your debt.
• Debt management plan:” This may be a recommendation from your credit counselor. You pay into a savings account to the counseling organization, who then makes payments to your creditors on your behalf.
• Bankruptcy: A personal bankruptcy discharges some of your debt, but it requires either a payment plan to creditors for up to five years or selling off your assets to pay your creditors.
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How Each Debt Relief Option Affects Your Credit Report
There are multiple categories that affect your credit score, and each debt relief option is likely to cause damage in some way. Here’s what you can expect.
• Debt settlement: This option can cause major damage to your credit report because payment history is the biggest contributing factor to your score. If you stop making payments, you will continue to accrue separate late payment entries. The debt will also be listed as “settled” on your credit report.
• Debt management plan: A credit report may indicate any accounts you’ve enrolled in a debt management plan. While that doesn’t directly hurt your credit score, it can be seen by future creditors and may influence their decisions. And if your counselor requires you to close accounts so you don’t charge more, your available credit could drop, hurting your credit card utilization ratio.
• Bankruptcy: A bankruptcy can cause your credit score to drop by as much as 200 points.
Check your credit score updates frequently as you navigate any type of debt relief.
What’s the Best Debt Relief for Me?
The Federal Trade Commission recommends starting off with strategies you can implement yourself. Making a budget, for instance, can help you track your spending and perhaps make different decisions about where your money goes. Try using a spending app to see what kind of progress you can make.
You can also talk directly to your creditor to create a new payment plan that works for your financial situation, especially if you’re having trouble paying your mortgage.
Debt Settlement vs. Staying Current
There are pros and cons to both options. You’re not guaranteed success with debt settlement, and your credit score could tank if you stop making payments on your accounts. Plus, any amount that is settled is considered taxable income. If you settle a large amount of your debts, that could bump you into a much higher tax bracket.
Staying current with your balances can preserve your credit. But if you’re just making minimum payments, you could see your balance grow as interest continues to accumulate. It’s best to talk to a credit counselor or other financial professional to help you weigh the pros and cons based on your personal situation.
How Long Does Debt Settlement Stay on Your Credit Report?
A debt settlement stays on your credit report for seven years. But your score should start to rebound before then, especially if you take proactive steps to build your credit.
The start date of the seven-year period depends on whether or not you have late payments associated with the account. If there were no late payments when you settled the debt, that settlement date starts the clock on seven years.
But if the account is delinquent or has late payments, the settlement stays on your report from the first late payment in delinquency.
How Debt Settlement Affects Your Credit Score
Debt settlement can hurt your credit score, but it may not cause as much damage as having the account go to collections. However, your accounts will be listed as settled, which is visible to lenders in the future. Although it takes time to improve your credit score after a debt settlement, it can increase before the settlement is removed.
How to Remove Settled Accounts from Your Credit Report
The only way to remove a settled account before the seven-year period is to file a dispute with one of the credit bureaus. This process doesn’t hurt your score, but is only successful if the account has incorrect information listed on your credit report.
How Long Does It Take to Improve Your Credit Score After Debt Settlement?
It depends on many factors, including how you handle your other finances in the months and years following a debt settlement. Proactively taking steps to rebuild your credit can help expedite the process.
How to Improve Your Credit After Settling Debt
Here are some strategies to help increase your credit score after debt settlement.
• Check your credit report regularly for accuracy. You can get a copy of your report for free once a week from each of the three major credit bureaus. Visit AnnualCreditReport.com to get started.
• Pay your bills on time.
• Get a credit card.
• Pay down any remaining high-interest debt.
Credit Score Tips
Knowledge is power when it comes to managing your credit. Check your credit score without paying to know where you’re starting from immediately after your debt settlement is finalized. Then use a credit score monitoring app to get personalized advice on what tactics to take.
The Takeaway
Any type of debt relief will have some impact on your credit score and financial future. Weigh the benefits and drawbacks of each option to choose the right next step. No matter what you decide to do, regularly checking your credit reports is a smart way to better understand your overall financial health.
Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.
FAQ
Does debt relief ruin credit?
It depends on the type of debt relief you choose. Debt settlement will be listed on your credit report for seven years, but your score could start to rebound before then.
How long does it take to rebuild credit after debt relief program?
There’s no exact timeline for rebuilding credit after a debt relief program. Expect it to take up to two years to start seeing a noticeable difference. Using a credit monitoring service can help you track exactly how much progress you’re making.
Can debt settlement be removed from a credit report?
Debt settlement can be taken off a credit report only if the information is inaccurate. Otherwise, it will take seven years before the settled debt drops off your credit report.
Photo Credit: iStock/Jelena Danilovic
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