How Debt Relief Improves Credit Scores by Hurting Them Short-Term
If you feel like your debt is suffocating you, you might be asking: Does debt relief hurt your credit? And if it does, is it still worth it?
The short answer is yes—debt relief will lower your credit score temporarily. But for some people, it could be a necessary step in helping you regain control of your finances. Whether you’re drowning in overdue payments or trying to avoid bankruptcy, here’s how debt relief affects your credit, how long the effects last, and why the long-term benefits may outweigh the short-term hit.
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How much does debt relief hurt your credit?
Debt relief can lower your credit score in the short term, but the long-term benefits may outweigh the initial damage.
When you enroll in a debt relief program, such as debt settlement or a structured payment plan, the company may ask you to stop making credit card payments. When you do this, your creditor will report missed payments or settled accounts to the credit bureaus. These actions can lower your credit score by 100 points or more, depending on your starting score.
This happens because credit scoring models view settled debts or missed payments as signs of financial risk. Even if you’re working toward a resolution, the temporary drop happens because you didn’t pay back the full amount you originally owed.
But as you reduce or eliminate your outstanding balances, you’ll lower your credit utilization ratio—a factor that accounts for 30% of your credit score. Over time, making consistent on-time payments and reducing your debt levels can help your score recover.
How many points will my credit score drop due to debt relief?
There’s no way to know exactly how much your credit score will drop with a debt relief program, but it’s not uncommon to see a drop of 100 to 200 points. The extent of the decrease depends on your starting score, the type of debt relief program, and how creditors report the changes.
For example:
- If you begin with a credit score of 700 or higher and settle multiple accounts, your score might fall to the low 600s or high 500s due to missed payments and accounts marked as “settled” instead of “paid in full.”
- If your score is already in the 500s due to delinquent accounts, the damage may be less noticeable because much of the negative activity is already reflected in your score.
Your score will typically hit its lowest point during the initial months of the debt relief process. This happens as creditors report missed payments or settlements, which can appear on your credit report right away.
This initial drop may be steep, but recovery will begin once you’ve lowered your credit utilization and started making on-time payments again.
How long does debt relief stay on your credit report?
Debt relief can stay on your credit report for up to seven years, depending on how your debts are resolved. When you settle a debt for less than you owe, it’s reported as “settled” rather than “paid in full.” This status remains on your credit report for seven years from the date of delinquency.
Collections accounts also follow the same timeline—they remain on your report for seven years after the first missed payment that led to the debt being sent to collections. It will stay on your report even after it’s paid.
Any lenders reviewing your credit during this time may view these marks as red flags. As a result, it may be more difficult to qualify for new credit.
If you begin rebuilding your credit right after completing a debt relief program, you could see notable improvements long before the seven years are up.
How bad does debt relief hurt your credit, and do companies differ?
National Debt Relief, Freedom Debt Relief, and Accredited Debt Relief all follow similar processes, so the impact on your credit score largely depends on how they manage your debts.
Although the programs themselves don’t directly lower your score, the steps involved—including stopping payments to creditors and settling for less than you owe—are what lead to the temporary credit hit.
For example, National Debt Relief requires you to stop making payments to creditors while it negotiates settlements on your behalf. As a result, your accounts are marked as delinquent or sent to collections, which lowers your score.
Freedom Debt Relief and Accredited Debt Relief use similar tactics, so the short-term credit impact is comparable. The main differences between debt relief companies are in their fees, customer service, and communication with creditors.
Before choosing a company, ask yourself:
- What are the fees? Most companies charge a fee of around 25% of the enrolled debt. They may also charge one-time setup fees and monthly servicing fees. Make sure you understand the costs upfront and have weighed whether they’re worth it.
- How long does the program take? Programs typically last two to four years. Confirm timelines to understand how long your credit will be affected.
- Do they offer credit repair guidance? Some companies provide resources to help rebuild your credit after completing the program.
All debt relief programs can temporarily harm your credit, but the differences among companies often come down to their approach and customer support. Researching fees, timelines, and reviews can help you choose the best option for your situation.
Is debt relief worth the lower credit scores?
Deciding whether debt relief is worth the temporary drop in your credit score depends on your financial situation and long-term goals.
If my client has short- to mid-term needs (e.g., employment requirement or getting approved for a home mortgage), I would suggest they wait until after meeting the short-term goal before moving forward with debt relief.
I educate them on the time frame it will be on their credit report and the steps they can take to build their credit profile in a manageable time frame using techniques that seem reasonable to them.
I recommend debt relief if the individual is unexpectedly unemployed, has no emergency savings, and could potentially result in bankruptcy or foreclosure on a home or be evicted from a home they are renting.
Erin Kinkade, CFP®
Debt relief might be a smart choice if:
- You’re overwhelmed by debt payments. If your monthly payments exceed what you can afford and you’re falling behind, debt relief can provide a structured way to regain control.
- You’re unable to pay your debts in full. If you’ve exhausted other options, including budgeting and negotiating directly with creditors, settling your debts through a program can help you avoid bankruptcy.
- Your credit score is already low. If missed payments and high balances have already hurt your credit, debt relief may not have a significant additional impact—and it could set you up for a stronger financial future.
Before you enroll in a debt relief program, ask yourself these questions:
- Am I willing to accept a lower credit score for several years?
- Do I understand the program’s fees and timelines?
- Have I explored alternatives, such as nonprofit credit counseling or a debt consolidation loan?
Debt relief isn’t a quick fix, and it’s honestly not the right fit for most people. But if handled carefully, it can give you the fresh start you need to rebuild both your finances and your credit.
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