by Sophie Kinsella

Credit score being a major player in our financial life, more and more people tend to depend on credit counseling agencies rather than on debt relief agencies to get rid of their debt burden. This agency helps them to pay off their debt by educating them with a proper debt management strategy. The positive side here is that your credit score receives a less severe impact. But, if you enroll in a debt relief agency to clear your debt, it casts a far more deep impact on your score and can lower your score by 50 points to 200 points.

When you enroll in a debt counseling agency, a note is sent to the credit reporting bureaus that you are paying your debt through a counseling agency. However, the impact of this report is far more lenient than enrolling in a debt relief agency. With a debt relief company, you pay your creditor less than you owe. You get substantial reduction on your interest rate and elimination of your late fines. This fact has negative impact on the credit score. Even the forgiven amount of your debt is deemed to be income by the IRS. So, you need to mention it while filing your tax return.

There are 3 major credit reporting bureaus-Experion, Equifax and TransUnion. These bureaus maintain a scoring formula or a model. Based on information obtained from your creditors, they simulate your credit score using this formula. Now, the matter is that how much impact your score may receive after enrolling in a debt relief agency, generally depends on your current score. Usually, a score below the 560 point is less likely to get any severe impact than a score above or near about 700 points. A person having a credit score below 560 is considered to be a risky borrower by the lending community. On other hand, a person having score above 700 enjoys creditworthiness. Creditors can rely on such a person as he has already had a good bill paying record in the past.

In this position, debt consolidation may be a wise alternative. It can help you manage your debt at an affordable level. Debt consolidation has less of an effect on your score. However, debt consolidation takes approximately 3 years to 5 years to relieve your debt. By debt settlement you can expect to clear your entire debt by 1 year to 3 years.

While enrolling in a debt relief agency plummets your credit score at an initial stage, with timely payment you can certainly improve it in the long run. By following a new repayment schedule, you pay off your bill and this way improve your credit score.