How using a Debt Relief Company Affects your Credit Score

Debt relief companies are businesses which require the business of those experiencing financial difficulties, in order to continue to receive either revenue from clients or funding from other sources. As such, they often make claims which should not be taken at face value, as the most likely outlook for those who seek debt relief and utilize such services is a resultant decline in their credit score.

The federal government advises that debtors should be cautious of claims made by these businesses and states, “only time and a conscientious effort to repay your debt will improve your credit score.”

The most common options which debt relief companies offer to their clients are debt settlement, bankruptcy, debt management plans and debt consolidation loans. Most commonly, fees are charged for these services which can represent a hefty slice of the money which could have been paid directly to creditors to reduce debts. It is important to understand that debt relief companies can do no more than the debtor is capable of doing themselves.

Nevertheless many people in debt feel overwhelmed and incapable of dealing directly with their creditors and thus seek help. Those tempted to do so should ensure they use a non profit company which does not make ridiculous guarantees, and provides a free service. The most typical scenario is that a debt relief company will charge an upfront fee which is equivalent to the amount needed to make one monthly payment to each creditor, followed by ongoing monthly fees.

When this practice is employed the debtor will find that their debt increases as the money which they would otherwise have paid to their creditors leaves their obligations unpaid, as the debt relief company retains the funds to cover their charges. The inevitable result is that debts go unpaid, which has an immediate negative impact on credit scores. Unfortunately, the debtor making use of this service is rarely advised of this consequence.

Debt relief companies are bound to report any arrangements made to the credit bureaus, which will then make a note on the credit file that a debt relief company is involved. This information will be available to anyone accessing the credit report and will be interpreted in a negative way. A debtor who resorts to debt relief companies is perceived to not only be a high credit risk, but a person who is incapable of dealing with their own finances, thus compounding the negative impression.

Those who are advised that bankruptcy is their best option should give thought to the consequences on their credit score. Bankruptcies remain a matter of public record for ten years and will definitely have a negative impact on credit. Employers are not legally allowed to take bankruptcies into consideration when making employment decisions but the information will be held on credit reports, thus creating a negative impression.

Debt settlement will inevitably have a negative impact on credit scores, and those who use debt consolidation loans are better advised to source these independently rather than through a debt relief company. Those who are tempted to use credit repair services should never pay any fees upfront. They are better advised to take their own steps to repair their credit than to pay a company to do something which the credit bureaus provide access for everyone to do themselves fee-free.

Usually debtors utilize debt management plans when using debt relief companies. These tend to increase the length of the debt and are rarely followed through to fruition. They do not help to improve credit scores, which is something those in debt should consider, alongside actually reducing their debts.

Anyone who has run up debts can make use of free advice to help them to reduce their debts. By acting independently they will likely see an increase in their credit score over time as outstanding debts are paid off and a larger proportion of their credit-to-debt ratio is reduced. Credit scores cannot be improved overnight, but they can be held lower for longer, particularly when debt relief companies enter the equation.