Yes, debt relief will most likely hurt your credit. But how much damage it does, and how long that damage lasts, depends to some extent on your credit history and financial circumstances.
For people struggling with serious debt and no better alternatives available, protecting a credit score may not always be the top priority. Debt relief involves weighing the potential credit consequences against the possibility of resolving debts you may otherwise be unable to pay.
Here’s what to expect regarding debt relief’s probable impact on your credit and what you can do to start rebuilding it afterward.
Why can debt relief hurt your credit?
The hard truth is that debt settlement generally depends on refusing to make your payments. If you’re still making at least the minimum payment every month, a creditor has little incentive to accept less than the full amount you owe.
A debt relief company will typically tell you to stop making payments on the debts you want settled. Instead, you’ll put whatever you can afford each month into a separate account while the company waits until enough money has accumulated to begin negotiating. Payment history is the most impactful factor affecting your credit score (making up 35% of your FICO Score for example) so those missed payments are where much of the damage to your credit can begin.
What happens when you stop making payments?
Once you stop making payments, the account can become increasingly delinquent. Late or missed payments will typically be reported to the credit bureaus once they’re 30 days or more past due, and the longer you go without paying, the further behind you become.
Meanwhile, interest and late fees may continue to accumulate, and the creditor may send the account to collections. All of this can add negative information to a credit history that may already be struggling.
What happens to your credit when a debt is settled?
Reaching a settlement resolves the debt, but it doesn’t erase what happened beforehand. The missed payments that led up to the settlement can remain on your credit reports, and the account may be reported as settled rather than paid in full.
That distinction matters because it shows that you didn’t repay the debt according to the original agreement. A settled account can generally remain on your credit report for up to seven years from the original delinquency date—the first missed payment that ultimately led to the settlement.
There’s no reliable way to predict exactly how many points your credit score will drop. The impact depends on your credit history and circumstances, and someone who entered debt relief with strong credit may have more ground to lose than someone whose credit was already badly damaged by missed payments. But, it’s not unreasonable to think your credit score could drop by 100 points or more.
The good news is that the effect doesn’t necessarily remain equally severe for all seven years. The impact of negative information can diminish over time, particularly as you begin adding new positive information to your credit history.
How to rebuild your credit after debt relief
It’s easier said than done, but rebuilding your credit after debt relief may require changing some of the financial habits or circumstances that contributed to your debt in the first place. If you’re generally financially stable but found yourself overwhelmed because of a major life event such as a divorce, job loss, or massive medical bill, you may have an easier time getting back on track once the crisis has passed.
But if you were relying on credit cards simply to meet your monthly expenses, there may be more structural changes to make. That could mean reworking your budget, reducing expenses, or finding ways to increase your income so you don’t have to rely on new debt to make ends meet.
From there, rebuilding your credit comes down to establishing a new track record.
Making on-time payments is absolutely crucial to maintaining a good credit score. If you fall behind, try not to let that late payment get to the 30-day mark. Creditors generally don’t report a late payment to the credit bureaus until it is at least 30 days past due.
If you still have credit cards, keeping balances low relative to their limits can help. A common rule of thumb is to keep your credit utilization below 30%—and lower than that is better.
As an example, 30% utilization on a card with a $500 credit limit would be a $150 balance. If you do not have a credit card account, applying for a secured credit card (a card type that requires you submit a deposit to the issuer) with a legitimate bank or credit union is worth considering. There are also products called credit-builder loans, specifically designed to help people with thin credit files or those who are working to repair their credit build positive history.
Rebuilding credit takes time, but you don’t have to wait for the negative marks from debt relief to entirely fade away before you can make a start.
Is protecting your credit score a reason to avoid debt relief?
If you can still afford your monthly payments, it may be. A debt consolidation loan or a 0% intro offer on a balance transfer card could help make your debt more manageable without requiring you to stop paying your creditors. (Know that these options will likely only be available to applicants who currently have good to excellent credit.)
A debt management plan, working with an accredited nonprofit credit counselor, could also be a way to better your situation without the negatives associated with debt relief.
But if you’re already missing payments and can no longer realistically repay everything you owe, protecting your credit score may be less important than resolving the debt itself. In that situation, debt relief may still be worth considering despite the damage to your credit.
The takeaway
Debt relief can hurt your credit, and the effects can follow you for years. But, it’s worth noting that your credit score is only one part of your financial health.
If your credit is still good enough to qualify for a debt consolidation loan or 0% intro balance transfer card with favorable terms, you may have options that don’t require you to stop paying your creditors. But if your credit has already deteriorated to the point where those options are no longer available, debt relief may offer a path forward despite the additional damage it can cause.
Remember that damaged credit can be rebuilt, though it should be looked at as a long journey to do so. Once your debts are resolved, every on-time payment and responsible use of credit can help you begin moving in the right direction.
Frequently asked questions
How long does debt relief stay on your credit report?
A settled account can generally remain on your credit report for up to seven years from the date of the original delinquency that led to the settlement. However, the effect of negative information on your credit score can diminish over time.
How long does it take to rebuild your credit after debt relief?
There’s no fixed timeline, and you don’t have to wait for negative information to disappear from your credit reports before you can start rebuilding. Making payments on time, keeping credit card balances low and using new credit responsibly can help you establish a positive payment history over time.
How much could your credit score drop?
There’s no set number. The impact depends on your credit history, how many payments you miss, how many accounts are involved and other factors. Someone who enters debt relief with a strong credit score may have more ground to lose than someone whose credit has already been damaged by missed payments. But, it’s not unreasonable to consider that some scores could experience a drop in the ballpark of 100 points.