Debt relief can damage your credit score — here’s how much it drops and how long it lasts

If you're drowning in overdue, ballooning bills, you've likely heard of debt relief.

Debt relief can look like different things, whether it's consolidating multiple credit card balances through a debt consolidation loan or going as far as declaring bankruptcy when you just can't pay anything off.

Depending on which route you take, your credit score can take a serious hit, sometimes around 100 points. That doesn't mean debt relief is always the wrong call, but it's worth understanding the trade-off before you sign up.

Here's what each type of debt relief does to your credit and how long the damage can last.​​​​​​​​​​​

Debt relief is a broad term for any strategy that helps you reduce, restructure or eliminate what you owe. The most common options are through debt consolidation, debt management plans, debt settlement and bankruptcy.

Debt consolidation rolls multiple debts into one loan or balance transfer card. Debt management plans let you repay the full amount through a nonprofit credit counselor, often at a lower interest rate. Debt settlement lets you negotiate with creditors to pay less than the full balance. Bankruptcy is a legal process that can discharge debt entirely or restructure it under court supervision.

The impact on your credit depends on which type of debt relief you pursue.

• Debt consolidation: Consolidation can help or hurt your credit, depending on how you do it. For example, if you open a new balance transfer card, the hard inquiry and new account can temporarily lower your score. But if you pay it down consistently, your score can recover and actually improve over time.
• Debt management plans: These plans tend to do less damage to your credit since you're still repaying the full balance.
• Debt settlement: Settlement typically does the most damage because it requires you to stop making payments while negotiations are underway. Those missed payments get reported to the credit bureaus and can cause your score to drop significantly before a settlement is even reached — in some cases, around 100 points. Once a debt is settled, it appears on your credit report as "settled for less than the full amount," which signals risk to lenders and can stay on your report for up to seven years.
• Bankruptcy: Declaring bankryptcy carries the most severe long-term consequences as it can stay on your report for up to seven to 10 years, depending on the type you file.

How debt relief appears on your credit report depends on the type you pursue.

If you go through a debt management plan, your accounts may be noted as enrolled in a plan but no derogatory mark is added.

A settled account is typically marked "settled for less than the full amount" and can remain on your credit report for up to seven years. Missed payments made during the settlement negotiation period are reported separately and can also remain on your report for seven years from the date of the first missed payment.

A Chapter 7 bankruptcy can stay on your report for up to 10 years, while a Chapter 13 can stay up to seven years.

Whether debt relief is worth the hit to your credit depends on where your credit stands before you pursue it. If you're already missing payments, your score is likely already taking damage and settling the debt could at least stop the bleeding.

If your credit is still in good shape, the drop from debt settlement or bankruptcy may outweigh the financial relief. A nonprofit credit counselor at the Financial Counseling Association of America (FCAA) or at the National Foundation for Credit Counseling (NFCC) can help you weigh the trade-off before you commit to anything.

Rebuilding your credit after debt relief can certainly take time, but it's possible. Here are some steps to get started:

Make every bill payment on time. Payment history is the biggest factor in your credit score, so consistency with always paying your bills on time matters more than anything else.

Open a secured credit card. If your credit is too damaged to qualify for a traditional card, a secured card can help you establish a positive track record. The Capital One Platinum Secured Credit Card is a good starting point if you can't afford a typical $200 deposit as you may qualify with as little as $49 down, plus Capital One will automatically consider you for a higher credit line in as little as six months. Another option is the U.S. Bank Altitude® Go Secured Visa® Card, which is one of the few secured cards that lets you earn travel rewards on everyday purchases like dining and streaming, and U.S. Bank can upgrade you to an unsecured card over time.​​​​​​​​​​​​​​​​

Keep your credit utilization low. Try to use no more than 30% of your available credit at any given time.

Avoid opening too many new accounts at once. Each application triggers a hard inquiry, which can temporarily lower your score.

Monitor your credit report. Check your credit report for errors or inaccuracies (especially after debt settlement) and dispute anything that looks wrong. Over time, the negative marks from debt relief will carry less weight as your positive history builds up.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt relief article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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