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Debt Relief

Picture of a Debt relief There is a question that almost all of us ask to ourselves, “How can I get out of debt?”. We begin thinking of solutions, and finally when that shiny light bulb pops out of our heads, one thing always seems to be on the way, “But what about my credit? I don’t want to ruin its reputation.” There are 3 possible approaches in dealing with this problem, but before we proceed, we have to remember a few things:

  1. 1.  Always remember that under one-third of your credit score is made up of your debt. So when you pay it off, especially credit cards that are close to going over the limit, you should see improvement in at least some of the factors that make up that part of your credit score.
  2. 2.  It’s impossible to gauge what happens to your credit score precisely. The impact on your credit score, whether a sudden drop or increase in ratings still depends on a lot of factors. For example, when your history shows on time payments then suddenly you file for bankruptcy, your scores will probably drop more than those of someone who was already severely delinquent.

The Snowball and the Avalanche

Most of us have dilemmas on which debt to pay first. But whether we use the snowball method, meaning we pay off the debts with the lowest balance first, or the avalanche method, meaning giving priority to credit cards that have high interest rates doesn’t hurt your credit at all. The key is as long as you are keeping up with the minimum monthly payment; your credit ratings are as safe as nut.
Total Credit Damage: None

Consolidating your Debt with a Loan

Getting a loan to pay off your other debts is actually not a strategy itself, but it may get you out of debt faster considering that the loan has low interest rates. As long as your monthly payments are reduced, you’ll be able to pay on time and help your credit recover faster than expected. But keep in mind that consolidating a loan may have positive and negative effects on your score, meaning it is still on the “it depends” category. On the positive side, if you pay off a credit card with a balance that's close to the limit, you may improve your credit utilization ratio (the ratio that compares your credit limits with the balances you are carrying), provided that you leave your credit card open after paying. On the negative side however, a new loan will show up on your credit report which credit reporting agencies count as a risk factor and may hurt your credit score.
Total Credit Damage: Modestly positive or negative, fairly easy to recover