How long does credit card debt forgiveness stay on your credit report?

Credit card debt forgiveness could hurt your credit score. 

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Are you thinking about enrolling in a credit card debt forgiveness program? These programs may be able to help by reducing the amount of money you owe to credit card companies through negotiations. But, there’s a drawback to consider. 

Credit card debt forgiveness can cause your credit score to drop substantially. Most credit card debt forgiveness solutions tell you not to make payments on your credit cards. Instead, you’ll allocate the money you would normally make payments with to saving for a settlement. But, those missed payments can harm your credit. 

If your credit card debt forgiveness program is successful, and you only have to pay a portion of your debt to clear it, the credit card companies will usually report that to the credit reporting agencies. So, your paid off account may show up on your credit report as having been settled for a lesser amount. That can also have a negative impact on your score. 

But, how long will you have to deal with the credit-based ramifications of these programs after you complete a credit card debt forgiveness plan? That’s what we will answer below.

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How long does credit card debt forgiveness stay on your credit report?

“Credit card debt forgiveness or a settlement typically remains on your credit report for around seven years from the date the account first became delinquent,” explains Michael Broughton, founder and CEO of the credit building app, ALTRO. “This negative mark can impact your credit score during that period, but, its effect will lessen over time, especially if you manage your credit responsibly going forward.” 

Nonetheless, if you’re interested in credit card debt forgiveness, you may have no other option but to deal with the credit impact of these programs. “Unfortunately, in order to negotiate the settlement in the first place, it’s usually advised to stop making payments,” says Dan Casey, investment advisor and founder of the financial planning firm, Bridgeriver Advisors. “A credit card company usually won’t negotiate a settlement if you’re current on payments.”

The good news is that credit card debt forgiveness programs aren’t the only debt relief solutions out there. While these tend to be the most fitting for those dealing with significant financial hardships, other solutions usually have a lesser impact on your credit report – if any at all. These include: 

Credit card debt consolidation

One solution to your debt may be to take out a new loan with a lower interest rate. When you do, you can use that loan to pay off your high interest debts. In doing so, you’ll cut your interest, which could result in lower minimum payments – providing the relief you’re looking for. If you pay off multiple accounts with one new loan, you can cut the number of payments you have to make each month, simplifying the payoff process. 

if you take the debt consolidation approach, you may improve your credit score. That’s because your credit utilization ratio is an important factor in determining your score. By paying off your credit cards with a new loan, you’ll substantially reduce this ratio. That is, as long as you keep your credit cards open, which may only be wise if you trust yourself not to overuse credit in the future.

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Credit card debt management programs

If you can’t qualify for a new loan or if debt consolidation doesn’t provide the relief you need, you may be better served by a debt management program. These programs are typically provided by non-profit companies that are on a mission to help consumers get out of debt. 

In most cases, these programs help you adjust your budget and come up with a more effective payment plan. They may also have experts who negotiate your interest rates in an attempt to reduce the monthly and overall cost of your credit card debt. In some cases, a debt management program may even collect a single monthly payment from you and act as an intermediary that pays your individual debts on your behalf. 

Depending on the type of debt management program you sign up for, it may have no impact on your credit score at all. That is, until you start to pay your debts off and your score improves. However, if your credit cards are closed as part of the program you choose, your credit score may fall due to a lack of available credit that then increases your credit utilization ratio. But, the negative impact on your score as a result of debt management is often minimal when compared to the impact credit card debt forgiveness usually has. 

Credit card hardship programs

Finally, you may be able to work with your lenders directly to achieve debt relief. That’s because many credit card companies offer financial hardship assistance. These are typically short-term programs through which your creditors may cut your interest rates and minimum payments to help you get back on track. But, there are a few drawbacks to consider before you sign up for a hardship program: 

  • Most credit card hardship programs are short-term solutions. 
  • If you miss a payment you could be kicked out of the program. 
  • Your credit card company may close your account, which could lead to a high credit utilization ratio, impacting your credit score. 

The bottom line

The negative impact of debt forgiveness on your credit score can last for up to seven years. But, that impact may be worthwhile if you’re looking for an alternative to bankruptcy or are otherwise in need of substantial relief from credit card debt. If that’s not the case, but you still need help, consider credit card debt consolidation, debt management or a hardship program. These solutions may not provide as much relief as debt forgiveness can, but they tend to have a minimal impact on your credit score, if any. Discuss your options with a credit card debt relief expert now

This post was originally published on CBS News

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