By Jackson Maven

Special to the Financial Independence Hub

“Debt,” though a small word, has a deeper impact. Settling debt makes people worried and sometimes may even disturb their entire finances. There are numerous ways by which one can settle debt, but the concern remains to find a way that would not cause any negative impact on Credit.

This article we will discuss ways in which the debt relief plan may affect your credit.

1.) Is Debt Settlement a good idea?

Debt settlement may cost a fortune for some; whereas, others may end up paying less than what they owed.

Non-payment of credit-card bills or other amounts due to the creditors for six months or more, worries creditors. In such a situation, you can make a debt settlement offer to your creditors. Here you can offer to pay the minimum amount that you can easily pay, against the total amount due. If your creditors want to close your account and are looking forward to getting whatever amount possible, they might accept the offer. On the contrary, if they demand full repayment, they may either transfer your case to a collection agency or may even take you to court.

2.) A few things to remember

Debts constitute a third of the credit score. Paying off debts helps in improving this part of the credit score. Impact of debt on the credit score depends on many factors. Hence, if you want to know the impact of debt on your credit score, you need to have a complete understanding of your credit history. Based on this, you can select the debt relief option that has the least impact on your credit score. Hence before selecting the credit relief option, a credit check is a must.

3.) Credit Utilization Impact

Credit utilization = Ratio of Pending credit card payment/Total Credit Card Limit *100

Lower ratio of credit utilization is always welcome. Higher credit utilization ratio results in lower credit score. In addition to this, it also reflects that lending you money can be quite risky as you are already overextended.

Debt Relief Options

i) Counselling

You can opt for credit counselling. In this, you can discuss your debt situation with a professional counsellor. A counsellor can advise you the best way to pay off your debts. The best part is these counselling sessions would have no impact on the credit score. But, if your counsellor registers you in a management or repayment plan, then that plan may have some effect on your credit score. Continue Reading…