An unfortunate result of the current recession is that many people fall behind on their payments and need assistance restoring some sense of order to the chaos in their bank accounts. The debt relief industry prospered over the past decade. Unfortunately, some debt relief companies engaged in unethical practices and made matters worse for their customers. However, other debt relief companies continue to provide a valuable service for those drowning in debt.
Before contracting with a debt relief company, consumers should be aware of how the service will affect their credit scores.
1. The use of debt relief companies to manage debt will lower a consumer’s credit score.
Debt relief companies report to the three credit agencies. The notice that a consumer is receiving assistance with debt management will lower the consumer’s credit score. The decrease in credit will depend upon credit history, credit score, and the policies of the credit agency. The point is that debt relief companies should not be the first option. Consumers should first consider if debt can be refinanced or if strict budgeting might free sufficient money to pay down debt. The use of debt relief services is preferred to falling into collections or filing bankruptcy.
2. The use of debt relief companies will cost money.
Debt relief companies will charge for their services since they are a business. The charge is typically monthly rather than upfront. In exchange for that fee, the company provides monthly updates about the progress of debt elimination.
3. The use of debt relief services is a marathon and not a sprint.
The use of debt relief services is like a marathon. The consumer’s credit score will go down in the short-run. Chances are finances will get more frustrating in the transition to using the debt relief company and a monthly lump-sum payment against debt. Borrowing more money may be difficult except from high-risk lenders who charge high interest. The consumer will face the uncomfortable necessity of living on a budget.
The benefits of using the service will gradually appear over time. Debt load will lower each month. Late payments will fall farther in the past and have less affect on credit scores. Credit scores will increase over time.
An unfortunate reality today is the current recession has produced economic hardships for many consumers. Late payments and an inability to pay have become realities for many. Debt relief companies offer a helpful service for those drowning in debt and who see no other way out short of bankruptcy. The wise consumer will need to become educated in the possible affects this service can have on their finances.