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How does getting out of debt affect your credit?

When you want to get out of debt, one of the questions you're undoubtedly asking is, "what's the best way to do this without ruining my credit?" Debt relief comes in many forms, and choosing the right one comes down to understanding how each one affects you in the long term.

For example, if you choose to participate in a debt snowball, which is when you pay off a credit card with the highest interest rate and then pay off the one with the next highest rate and so on, your credit shouldn't be hurt in any way. As long as you make payments on time on all your debts, your credit can only improve as you reduce your overall credit debt.

Debt consolidation, on the other hand, can damage your credit if you don't do it in the right way. For instance, consolidating all your debt can mean reducing how much you owe each month, which makes it easier to pay on time. This could help improve your credit. However, it also means you could take a major hit if you miss a payment. You may also see a dip in your credit rating because of the new credit line being added to your account with a large amount of debt.

Contrary to popular belief, credit counseling won't impact your credit at all since the agency doesn't report to the credit agencies like Experian or TransUnion. Even if it is reported that you're using a debt counseling company to help you, FICO does not take this into consideration when determining your credit score.

Some other potential options, like bankruptcy, could negatively affect your credit or be in your best interest, depending on your circumstances. With any negotiations, you may want to work with an attorney or professional as a go-between between you and your lenders.

Source: Credit.com, "How Do Debt Relief Options Affect Your Credit?," Gerri Detweiler, accessed Jan. 30, 2017

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