Does Accredited Debt Relief Hurt Your Credit
We’ve all heard the phrase, “too much of anything is bad.” But does this apply to debt relief too? You’re probably wondering if accredited debt relief can actually damage your credit score. It’s a common concern, and understandably so. After all, your credit score is a vital part of your financial health.
In this article, I’ll delve into the nitty-gritty of accredited debt relief and its potential impact on your credit. I’ll offer insights, debunk myths, and guide you towards making informed decisions. So, if you’re on the fence about debt relief, stay tuned! This could be the game-changer you’ve been waiting for.
Understanding Credit Scores
Continuing from where we left off, it’s essential to take a closer look at credit scores to better understand their implications.
What is a Credit Score?
A credit score, in simple terms, is the numerical expression of one’s creditworthiness. It’s a three-digit number that lenders use to predict how likely you are to repay your loans on time. Remember, credit scores fall within a range, typically from 300 (poor credit) to 850 (exceptional credit). This score isn’t arbitrary; rather, it comes from an intricate calculation involving various details about your credit history.
How is a Credit Score Calculated?
The calculation of your credit score, often considered a complex process, involves multiple aspects of your financial behavior. Credit bureaus, like Equifax, Experian, and Transunion, use specific algorithms to evaluate these factors and assign you a score.
- Payment History This factor weighs the heaviest, accounting for 35% of your credit score. It reviews your consistency in bill payments. Any late payments, defaults, or bankruptcies have a negative impact, bringing down your credit score.
- Credit Utilization Making up 30% of your score, this pertains to the ratio of your credit card balances to their respective credit limits. If you’re using a large proportion of your available credit, it can lower your score.
- Length of Credit History The longer you’ve had credit, the better. This aspect comprises 15% of your score.
- Credit Mix This refers to the variety of credit types you have, including credit cards, mortgages, and auto loans, among others. It accounts for 10% of the total score.
Understanding the composition and calculation of a credit score is critical to comprehend how any decision, including opting for accredited debt relief, impacts your financial standing.
The Impact of Debt Relief on Credit Score
Depending on the specific method used, debt relief can have varying impacts on one’s credit score. Place predominant importance on understand these effects in order to manage and improve financial situations astutely.
Paying Off Debt vs Credit Score Impact
By reducing the amount of debt one owes, paying off debt generally improves a credit score, to a degree. For instance, paying off a credit card debt reduces your credit utilization rate, which is a factor that makes up 30% of a FICO score. Hence, maintaining low balances on credit cards could potentially boost your credit score. However, the manner in which you do so can have an impact as well.
Settling a debt, despite being a method of paying it off, often leads to a lower credit score. This is because, under these circumstances, the creditor agrees to accept a payment lesser than the amount owed. Even though this decreases your overall debt, it can negatively affect the payment history aspect of your FICO score, which accounts for 35%.
What Happens to Your Credit Score After Debt Relief
Accredited Debt Relief, similar to other debt settlement companies, influences your credit score by the actions it demands. In this case, you’d stop making payments to your creditors directly, and rather save money in a separate account set up through the company. This sudden stoppage in payment would likely result in your credit score dropping, at least in the short term.
In the long term, however, once a successful negotiation with your creditors occurs and your debts get settled, it can allow you to ultimately start repairing your credit. Yet, these settled accounts will remain on your credit reports as “settled” or “paid settled” for seven years, which indicates to potential future creditors that you have not paid your past debts in full.