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Which Is More Important – Beating Debt Or Your Credit Score?


Sick of debt lingering over every financial choice you make? Wish you could put it behind you with one decision? Technically, you can.

But what if doing so severely impacted your credit score? Would you still want to eliminate your debt, or would making the minimum payments on a growing balance make you more comfortable?

The question of whether beating debt is more important than damaging your credit score is sort of a trick question, because you either have the option to solve debt proactively without affecting your credit score or you don’t. Let’s look at three different scenarios that will help you gauge your options.

Beating Debt That Doesn’t Harm Your Credit Score.

If your debt is becoming an issue but you’ve caught it’s in its early stages, be proactive in speaking with your creditors. It’s always a better idea to call and explain your situation before you miss payments. Being proactive could get you a restructured payment plan, a one-month grace period or other assistance to get you back on track. Remember: creditors want their money. They’ll be happy to help early on before the debt mounts and the prospect of receiving the full amount they’re owed becomes less likely.

Beating Debt That Dings Your Credit Score.

Enrolling in a debt management plan offers the benefits of paying your unsecured debt at reduced rates and free of fees. Debt management plans involve you making one contribution each month to a credit counseling agency. Your payment then gets distributed among your various creditors. Focusing on one payment each month lowers stress and gives peace of mind that each creditor is getting paid. Debt management plans usually require debtors to close all their accounts though, which impact credit score. NerdWallet advises debtors to choose their agency wisely, making sure they’re accredited with the National Foundation for Credit Counseling (NFCC).

Beating Debt That Hurts Your Credit Score.

When you can’t keep pace with your debt, the adverse effects on your credit score are soon to follow. Debt settlement does hurt your credit, but it also usually helps you reset your financial life much faster than bankruptcy and doesn’t require you to completely flake on your creditors. The process is also much less intensive than finding an attorney and going through the legal process because debt settlement companies take the reins for you. Many providers, such as Freedom Debt Relief exist to ease the burden of negotiating with creditors to settle some of your debt in exchange for a percentage fee of what they’re able to settle. Bankruptcy will have costs as well, but in the form of court fees, finance management classes and attorney costs.

Beating Debt That Devastates Your Credit Score.

If you have more debt than you can make progress on, you fall into this category. Your options basically include bankruptcy via chapter 7 or chapter 13. The option you choose will depend on whether you have sufficient income or not; Chapter 7 strips your assets but doesn’t require payments whereas chapter 13 allows you to keep your assets as long as you can make court-ordered payments for 3-5 years. The fact that these options damage your credit score however, is moot. If you’re in a financial situation that calls for bankruptcy, you’ve likely already damaged your credit score and just need a way out. Though, it’s worth noting that declaring bankruptcy will negatively affect your credit the longest out of any debt forgiveness option.

Good Financial Habits Eventually Resurrect All Credit Scores.

Regardless how bad you’ve hurt your credit score; a new beginning is always ahead. If you’ve had to close your credit accounts for a debt management plan, it might take a few years to get back to where you were, and you might have trouble opening up new lines of credit. Unless you’re completely unable to purchase on credit, making purchases that you can immediately afford to pay off starts a nice habit and slowly builds your credit back up.

If debt settlement or bankruptcy are your only options, expect your credit to be damaged for at least five to seven years, but possibly longer, especially if filing chapter 7 — which can remain on your credit report up to 10 years after the filing.

Of course, if you’re in that first group and caught your debt early on, your credit probably hasn’t suffered at all, and your proactiveness will lead you to greener financial pastures. If there’s one thing to take away here, though, it’s that beating debt always trumps a credit score. The latter is the result of the former, so you’d be well advised to solve the root issue before worrying about the health of your credit score.