Key takeaways
- On-time payments and the amount you owe compared with your limits matter most for your score.
- Consolidation and debt management plans usually have the mildest effect when you keep paying on time.
- Debt settlement usually means missed payments, which can hurt your score badly.
- Most negative information can stay on your report for seven years; bankruptcy for up to ten.
- Check your reports for free every week at AnnualCreditReport.com.
If you’re thinking about getting help with debt, you’re probably also wondering what it will do to your credit. The plain answer: it depends on which path you take, and above all on whether you keep making payments on time. Here’s how the main options compare.
What drives your credit score
Credit scores are calculated from the information in your credit reports. A few things carry the most weight:
- Payment history. Whether you pay on time. Late and missed payments hurt the most.
- How much you owe. Especially your credit card balances compared with your credit limits.
- Length of credit history. Older accounts help.
- New credit. Applying for loans or cards adds hard inquiries, which can lower your score a little for a while.
Keep those in mind as you read the options below.
Option by option
| Option | What shows up on your report | Typical effect |
|---|---|---|
| Debt consolidation loan | A new loan, a hard inquiry, cards paid down | A small dip at first; can help over time with on-time payments |
| Debt management plan | Your accounts, often with a note that you’re in a plan; some cards may be closed | Usually mild if you pay on time; closed cards can raise your usage rate |
| Debt settlement | Missed payments, then accounts marked as settled for less than owed | Usually a serious drop while payments are missed |
| Bankruptcy | The bankruptcy filing and the included accounts | A serious drop; stays on your report for up to ten years |
Debt consolidation
Applying for a loan adds a hard inquiry, and a new account lowers the average age of your accounts. Both can cause a small, short dip. Paying off your cards with the loan lowers your card balances, which can help. Over time, on-time loan payments build your payment history. The risk is running the cards back up.
Debt management plan
With a debt management plan through a nonprofit credit counselor, you keep paying what you owe, usually at a lower interest rate. Creditors may close the cards in the plan, which can raise the share of your available credit you’re using. But because you keep making payments on time, the effect is usually milder than options that involve missed payments.
Debt settlement
Most settlement programs ask you to stop paying your creditors while you save for a settlement. Those missed payments are reported, and they hurt. When a debt is settled, it is usually reported as settled for less than the full amount, which future lenders see as negative. Settlement can also bring late fees, collection calls and possibly lawsuits, and forgiven debt may be taxable. Results are not guaranteed. Our debt settlement vs. debt consolidation guide goes deeper.
Bankruptcy
Bankruptcy has the biggest effect on your report and lasts the longest. It can also give a fresh start when debts are far beyond what you can repay. A free consultation with a bankruptcy attorney can help you weigh it.
How long negative items stay
According to the CFPB, credit reporting companies can generally report most negative information for seven years, and bankruptcies for up to ten years. The good news: the impact usually fades over time, especially as you add new on-time payments.
Be wary of quick fixes
No company can legally remove accurate negative information from your report. Be careful of anyone who promises to “fix your credit fast” or tells you a debt program won’t affect your credit. The CFPB notes that disputed items can be removed and then reappear after they are verified.
You can dispute real errors yourself, for free, with the credit bureaus.
Check your credit for free
You can see your credit reports from Equifax, Experian and TransUnion for free once a week at AnnualCreditReport.com, the only official site for free reports, according to the FTC. Look for accounts you don’t recognize, wrong balances and late payments you made on time.
Rebuilding after debt relief
- Pay every bill on time. It’s the single biggest factor.
- Keep card balances low compared with your limits.
- Don’t open lots of new accounts at once.
- Give it time. Recent behavior counts more than old mistakes.
If you’re still paying down cards, the debt avalanche and snowball methods can help you plan it. If collectors are calling about old accounts, see your rights when a debt collector calls.
The bottom line
Options where you keep paying on time, like consolidation or a debt management plan, are usually easier on your credit. Settlement and bankruptcy cost more credit-wise but may make sense when the debt is truly unmanageable. A nonprofit credit counselor can help you weigh the trade-offs for free or a small fee.
Sources: CFPB: how long negative information stays on your report · CFPB: credit counseling, debt settlement, consolidation and credit repair · FTC: free credit reports · IRS Topic 431: canceled debt