How Does Credit Card Debt Relief Effect My Credit Score?

A major question that people ask is how legal debt relief effects your credit score. The answer to this is less cut and dry as one might think. To explain this, we must first look at how your credit score is calculated and how dealing with the debt affects these calculations.

FICO (Fair Isaac Company which created the credit scoring system) Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

A FICO score takes into consideration all these categories of information, not just one or two. No one piece of information or factor alone will determine your score. The importance of any factor depends on the overall information in your credit report.

Before beginning a full-scale attack on one’s bad credit and repair of a negative credit report the person must first address each of the negative items and resolve them. Resolution may take many forms, which we will explore here. From a credit repair or credit rebuilding standpoint the significant starting point is "closing the book" on each of the bad credit items on the credit report. A horrible but old and closed bad credit item most often gets viewed better than an open current bad credit item.

The next thing one must look at is how each form of resolving your debt will affect your credit score and to what degree. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.

• Paying monthly minimums.

• • Some people feel that their only option is to continue to pay their monthly minimums hoping that some day they will resolve their debt. This option will, depending on your interest rates, take as much as 38 years to accomplish and in the process pay thousands of dollars in interest. While doing this option you will be affecting your debt to credit ratio which according to the FICO chart above makes up thirty percent of your overall credit score

• Bankruptcy.

• • Typically a bankruptcy will stay on your credit report for up to ten years. It is also a part of your public record for the rest of your life. Because of this many people feel that Bankruptcy has the longest affect on your credit report.

• Consumer Credit Counseling
• • With this option a creditor has the option to mark you as being in collections or being paid by a third party, indicating that you are in a Consumer Credit Counseling program for the entire length of the program, which is typically 5 to 6 years. 
    
• Debt Settlement
• • This will have an initial affect on your payment history which as the chart above indicates, is about 35% of your credit score. As each account is paid off and reported as a zero balance, it will have a positive effect on your debt to credit ratio which accounts for 30% of your credit score.

Your FICO score only looks at information in your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit and length of loan you are requesting. Your score considers both positive and negative information in your credit report. Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score. score, but establishing or re-establishing a good track record of making payments on time will raise your FICO credit score.