Does Debt Relief Hurt Your Credit?

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Cutting up your credit cards helps you to get rid of your debt.
Cutting up your credit cards helps you to get rid of your debt. (Image: Debt concept - cutting a credit card image by Sophia Winters from Fotolia.com)

When you are in financial trouble and your debt level is becoming impossible to handle, you will probably begin to notice the many advertisements enticing you to try debt relief. If you notice, the term “debt relief” is supposed to calm you down and lure you in. Before you complacently turn your trust and your money over to a debt relief firm, you may want to consider how debt relief hurts your credit.

Types

Differences exist between legitimate credit counseling agencies, such as ones you can find through the National Foundation for Credit Counseling, and ones that can cause you to be in even more debt. The reputable agencies will advise you on how to manage your money and your debts and will offer you free educational materials and workshops, according to the Federal Trade Commission. A legitimate credit counselor can work with you to develop a personalized plan.

Effects

Debt relief companies are looking for people who want the easy way out. In addition, these companies do nothing to solve the problems that got the consumer in trouble to begin with, which is generally overspending, according to the MSN Money website. These organizations tell people that they can get creditors to accept 50 cents on the dollar, or some such figure. If you agree to let them handle your debt load, the first thing you do is to stop paying your creditors, which will have a negative effect on your credit.

Features

Once you stop paying your creditors, you start paying money to the debt relief company, which is putting your money away in an account for you until enough is in it to pay the debt relief company’s fee and for the debt relief company to make an offer to your creditors. It could take years to gather enough money for that to happen, and in the meantime, your creditors are reporting to the credit bureaus that you are paying nothing on your accounts, even though you are paying the debt relief firm.

Warning

Some creditors will not stop at just reporting you to the credit bureaus. Some creditors may sue you to try to collect their money. Your credit score will be at the lowest level ever, meaning your ability to get a loan for anything will be very low, if not impossible. The bottom line is that if you use a debt relief company to settle your debt for you, it could cause ongoing damage to your credit report, according to the Military Money website. Debt relief firms can cost you more money than your initial debt when you consider the impact on your credit rating and the fees they charge you.

Prevention/Solution

Whatever you do to try to get out of debt, the best advice is to stop using your credit cards, says MSN Money columnist Liz Pulliam Weston. You don’t have to close your accounts. Just cut up your credit cards or freeze them in a block of ice.

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