We all want to achieve a successful debt freedom. When we say successful, we do not just mean paying off our debt. We are after a consistent freedom from debt – at least, free from the destructive powers that it can bring our finances.
However, a lot of people are torn between maintaining a good credit score and being debt free. This conflict sometimes causes them to choose the wrong debt solutions that will help them get rid of their debts.
A lot of Americans are too conscious of their credit scores. This is good news, but that depends on what they know about this financial measuring tool. According to a survey done by Bankrate, more Americans are checking their credit status. Last March, Bankrate found out that almost half of consumers checked their credit rating within the year. However, the same study also revealed that some people have the wrong notion about credit scores. For instance, 5 out of 10 Americans believe that an account with a high balance will help improve their score – as long as it is paid on time.
Although paying on time will help you with your score, having a high balance will not. Remember that you do not need to borrow too much money for you to have a high score. You can actually be considered debt free and still have a high score. You just have to know how to accomplish this.
Probably that is more troubling about the battle between debt freedom and the need for a good credit score is that it limits the debt relief options of consumers. For instance, some consumers may turn down debt settlement because they feel like their scores will be ruined in the process. They will try to use something else like debt consolidation to keep their scores intact. While there is no problem with debt consolidation, you have to understand that if you need debt reduction, then debt settlement is the right solution for you. Do not force yourself to use a debt relief program that you cannot afford to complete.
When to prioritize being free from debt over a good credit record
We recognize that the concern of consumers when it comes to a high credit score is not unfounded. According to VantageScore.com, you can be denied access to credit if you have a low score. Sometimes, you will be granted the loan but it will cost you more because you will be given a high-interest on that loan or credit account. A good credit rating can help you avoid spending more because the creditor or lender will not think of you as a high-risk borrower. They usually reserve the high-interest rates to the high-risk loan applicants because the chances of them not paying them back is higher. A good credit score means you are a responsible borrower and that creditors and lenders do not have to protect themselves against you through high-interest rates. They know that you can be trusted with the loan.
While this importance is recognized, there are cases wherein you need to let your credit score slide if that means you will achieve debt freedom. Here are the situations that you need to stop worrying about your credit score and just do what it takes to be free from debt.
When your credit score is already damaged.
First of all, if your credit score is already damaged, then you need to prioritize getting out of debt. If you work on rebuilding your score while you are still in debt, your effort might be wasted. You may end up ruining that score again because you have not yet solved your debt problem. Get yourself out of debt first – even if it means your score will suffer for it. Once you are out of debt, you can start rebuilding your score again.
When you do not need to borrow money in the near future.
The next situation wherein you should choose debt freedom over a good credit score is when you do not have plans of borrowing money – at least in the next year or so. If you want to buy a house, you need to pay off your debts first and rebuild your credit so you can have favorable interest rates. Concentrate on strengthening your finances first before you decide on taking on another credit obligation.
When you already have a house or car.
Most of the time, the only time that you need a good credit score is when you need to buy a house or car. But if you already have them, why would you need to maintain your credit score? That is no longer necessary. Work on lowering your debt balance first.
When you are near retirement.
Usually, it is not advisable that you borrow more money when you are nearing retirement. You are about to give up your source of income. It does not make sense to put yourself further in debt at this point in your life. Although you can survive retirement despite your debt, why would you want to subject yourself through that? You will be compromising the retirement fund that should have been financing a comfortable life for you. Do not share it with your debt payments.
2 debt solutions that will get you out of debt but ruin your score
Most of the time, people who are faced with the difficult decision of choosing between debt freedom and a good credit score are those who require a reduction on their balance. Some people do not have enough finances to pay off the whole debt. This means they need a portion of their debt forgiven. In most cases, this is only possible but it will cost them their credit score.
These are the two debt relief programs that will help you reduce the balance that you owe.
The first option is debt settlement. This debt solution will help you negotiate your balance. The idea is to prove to the lender or creditor that you are in a difficult financial situation. You have to prove to them that your current finances can no longer sustain debt payments according to the original terms. You will then negotiate to pay only a portion of the debt and the rest will be forgiven. You have to be prepared to do some serious negotiations and make sure you will only agree to pay what you can afford. If you fail to follow what you agreed upon, you might end up forfeiting the settlement and pay the whole sum that you owe.
Debt settlement is something that you can accomplish on your own. However, there are some people who do not have the time to go through the negotiations. This is where a debt settlement company comes in. You can get in touch with a reputable company that will help negotiate on your behalf.
The other debt solution that will allow you to reduce your balance is bankruptcy. There are two ways that this can go. If you qualify to file for a Chapter 7 bankruptcy, your assets will be liquidated and will be used to pay off your debts. Anything that cannot be paid will be discharged. This is only applicable to borrowers who are going through extreme financial hardship.
The other option is Chapter 13 bankruptcy. If you qualify to file for this type of bankruptcy, your assets will not be liquidated. Instead, the bankruptcy court will provide you with a payment plan that usually covers only a portion of what you owe. Whatever is not covered will be discharged. This repayment plan can take a couple of months or years to complete. That depends on the ruling of the bankruptcy courts.
If you will opt for this debt solution, take note that not all debts can be discharged by bankruptcy. According to FindLaw.com, there are certain types of debt that cannot be discharged through a Chapter 7 bankruptcy. These include what you owe on your taxes, debts not listed when you filed, court fees, child support and alimony, debts from a DUI incident, and other non-dischargeable debts from a previous bankruptcy ruling.
It is important to note that both debt settlement and bankruptcy can lower your credit score – oftentimes, significantly. But if you are really after debt freedom and you can relate to some of the items above, then you need to just let your score slide. Once you are free from debt, then that is the time when you can look into fixing your credit report.