Debt Relief & Your Credit — The Skinny On How Debt Relief Plans, Credit Counseling, Debt Settlement and Bankruptcy Affect Your Credit

Filed under Bankruptcy, Credit Card Debt, Credit Counseling, Credit Help, Debt Consolidation, Debt Payoff Plans, Debt Settlement by on October 6, 2010 at 2:15 am {no comments}

Your credit will be affected no matter what you do.

Let’s learn how…

First, let me ask you an interesting question:

What do you really need your credit score for, other than acquiring more high interest (bad) credit card debt?

How much is your credit score costing you each month, in real dollars?

(Dollars you could spend on food, shopping, vacation, retirement, your children, education, etc, instead of handing it over to your creditors in interest payments every month?)

Credit Importance Test

What’s most important to you?

1. To have the lowest monthly payment possible on your debts?
2. To get out of debt for the lowest amount possible?
3. To get out of debt as soon as possible?

In 2005 I conducted a “National Debt Relief Survey” while serving as COO of STARTOVERTODAY.COM, a nationwide financial solutions company I co-founded in 2002. I surveyed over 10,000 people who had asked us for help with their credit card debt online this question, “What is most important to you?”

Here are the results for the answers chosen:

  • Lowering your monthly payments 7.6%
  • Reducing the amount of debt you owe 12.7%
  • Getting out of debt ASAP 42.4%
  • Preserving perfect credit 4.2%
  • Restoring less-than-perfect credit 16.1%
  • Having only one monthly payment 4.2%
  • Stopping creditor calls 4.2%
  • Reducing or Eliminating Interest & Fees 3.4%
  • Other 5.1%

When I saw these results, all I could say was, “Wow!”

I was shocked, and so were the executives of several top debt management companies who I shared the results with, because we were all convinced up until then that most people just wanted the lowest monthly payment. As it turns out, most people just want to get out of debt ASAP!

Back to the question I asked you a minute ago, here it is again:

What’s most important to YOU?

1. To have the lowest monthly payment possible on your debts?
2. To get out of debt for the lowest amount possible?
3. To get out of debt as soon as possible?

Would you be willing to lower your credit “rating” in the short term in order to accomplish (Questions #1, #2, or #3 above) if it improved your credit “worthiness” long term?

* See Credit “Rating” vs. Credit “Worthiness” if you do not understand this question.

High Credit Scores

If keeping your credit score high (assuming it’s already high enough to matter) is more important to you than getting out of debt the fastest, cheapest or for the lowest payment, then the only options you have are either continuing to make your minimum payments or get out faster by paying even more per month and doing what’s called an “accelerated debt payoff plan“.

Still, we must ask ourselves, what do we want credit for?

…A quote I read in an article once said:

“worrying about your credit rating when you’re drowning in debt is like worrying about how your front yard looks when your house has just burned to the ground…”

“Less-Than-Perfect Credit”

If you have less than perfect credit, then you may not have much to lose at all, and a whole lot to gain. You’ll learn the specifics of how each option affects your credit and understand which option will eliminate your debt and credit problems, and be easiest to clean up after. Plus, you’ll learn how to repair and build your credit, no matter what you’ve been through.

Credit Myth Exposed

There’s a myth out there that you can lower your monthly payment, get out of debt for the lowest amount possible and/or get out of debt as soon as possible WITHOUT any negative effect on your credit.

Well, this is simply not true. The fastest ways to get out of debt all have some kind of negative affect, minimal or extreme.

The truth is, there is no option available for you to accomplish what you have in mind whether you want to lower your monthly payment, get out of debt for the lowest amount possible and/or get out of debt as soon as possible WITHOUT negatively affecting your credit in the short term.

So let’s take a look at the debt relief options available to lower payments, reduce balances and get out of debt ASAP, and how each negatively affects your credit…

Bankruptcy

Any bankruptcy is an extremely negative item on your credit report, often viewed as the worse mark you could ever have. Chapter 7 stays on your credit for 10 years. Chapter 13 stays on your credit report for 7 years AFTER it’s discharged, usually following a 5 year repayment plan, thus damaging your credit for a total of 12 years!

Mortgage guidelines will not allow you to get a mortgage loan or refinance for at least 24 months after discharging a chapter 7 bankruptcy filing, and up to 48 months after discharging a chapter 13 bankruptcy.

Still, if you cannot afford any other option, then you may need to consider bankruptcy.

Credit Counseling

“Credit Counseling” is also known as CCCS, Consumer Credit Counseling Services, Debt Consolidation and Debt Management Programs.

Credit Counseling no longer affects your credit “score”, BUT enrolling in this type of program DOES have a major negative impact to your credit “worthiness”. Lenders view this just as negatively, or worse, than bankruptcy. In fact, seeing enrollment in Consumer Credit Counseling on a credit report is often called a “walking bankruptcy”. This negative affect lasts about 30 days longer than the debt management program lasts, which is usually 5-7 years. If you cannot afford an accelerated payoff plan and do not qualify for debt settlement, then you need to consider credit counseling.

Just make sure you understand what you’re getting involved in: Credit Counseling Lies Exposed – The Truth Non-Profit Credit Counselors Don’t Want You to Know

Debt Settlement

Debt settlement has minimal to serious damage to your credit rating due to late payments and charge offs, depending mostly on how good your credit rating is in the first place. Debt settlement may significantly affect someone with perfect credit but may not have much negative affect at all on someone who’s already fallen behind. In fact, debt settlement may significantly improve credit rating and worthiness for such individuals rapidly.

NOTE: Debt settlement is not reported on credit report as a bankruptcy and credit counseling are.

If you cannot afford an accelerated debt relief plan, then you may want to consider debt settlement.

Debt Relief Options

Let’s take a closer look into your options to get out of debt:

 

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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Debt Relief Options: Accelerated Debt Payoff Plans

Filed under Debt Payoff Plans by on January 3, 2009 at 7:32 am {no comments}

Instead of paying off your debt with a lump sum check, here’s another accelerated debt relief option which may be the next best thing.

It’s promoted by David Bach, Dave Ramsey or Steve Smith; pretty much any financial guru out there. It’s called an “accelerated debt pay off plan”, and goes by many names: “margin roll up plans”, “debt roll down plans”, the “debt snowball method” and the “DOLP method”. There are three main flavors of these accelerated debt relief plans, yet they all boil down to the same principles.

The basics are these accelerated debt relief plans are this: if you want to get out of debt as fast as possibly without any negative impact on your credit whatsoever, you just need to pay off your debt.

If credit is ultimately most important to you now, then you must cut your expenses to the bare minimum and put EVERY DOLLAR you can towards paying off your debt in an accelerated fashion in order to get out of debt ASAP.

Accelerated debt pay-off plans come in three main types. In each, you continue to pay the minimums on all accounts and all the additional money you can afford beyond this becomes the money you’re going to use to pay off your debt.  This is often called your “margin.” Your margin is then focused on ONE account at a time, the differences between the three types of accelerated debt relief plans is in which account you choose to pay off first…

The three different approaches to Accelerated Debt Pay-Off Plans are:

1) List your debts in order of the highest interest rate to lowest. Use your margin funds to pay down the highest interest account first (it’s costing you the most) until it’s paid off, then pay down the next highest interest rate account and so forth, until your debts are eliminated…

2) List your debts in order of the current balance, paying down the account with the lowest balance until it’s paid off,  (this can help your credit by showing open accounts with low to zero balances, improving your debt to credit limit ratio), then pay down the next lowest balance account, etc., until your debts are eliminated…

3) Take the current balance of each account and divide it by the minimum payment (= division number), then list your debts by this division number from the smallest to the biggest, paying down the account with the lowest division number until it’s paid off, then pay down the account with the next smallest division number, and keep going until you’re debt free…

Any of these three Accelerated Debt Pay-Off Plan approaches can usually get you out of debt in about five to seven years if you can afford to pay double or triple your minimum monthly payments, and IF you are committed to budgeting and putting as much money as possible into your margin. This can be less or more obviously depending on your total debt. It requires self discipline and long term commitment.

Each of these “accelerated debt relief”  approaches require paying significantly MORE than your minimum payments.  If you really get serious about it,  you could be debt free even faster by putting more money towards paying off debt.

You will have no negative affect on your credit with an “accelerated debt pay off plan.”

It’s a very simple idea but not a lot of consumers organize their accounts or payments in this fashion. People may put their extra money towards the largest balances, or take turns putting extra money throughout all of their accounts, continually paying interest on their entire debt profile. Instead of spreading your payments between accounts, the accelerated debt relief plan is a much better way to structure your payments and put your money to its best use to be debt free ASAP.

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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