How Can the Loan Modification Programs Save My Credit Rating?

by tammy on April 10, 2010

People who have found themselves in debt or who are simply having trouble making mortgage payments often wonder how a loan modification agreement will affect their credit rating. Many people who are in desperate need of a loan modification will turn down this option for fear of having it ruin and forever haunt their credit score. This is not always the case. Though a loan modification can sometimes have a negative effect on one’s credit score, it is almost always a better option than foreclosure and can sometimes even have positive results in the long term.

Different lenders will report loan modification agreements to credit bureaus in a wide variety of different ways. Though borrowers generally do not have a great deal of control over how this will be reported, this is what will ultimately affect how it appears on one’s credit rating. If a lender does not report the loan modification to the credit bureaus as a settlement, one’s credit rating will be unaffected or may even improve somewhat since the amount of the payment will often be decreased. If the lender reports the change as a settlement , this often represents one’s inability to pay off his or her loans and can negatively impact the credit rating. However, the impact that this will have on one’s credit rating will be infinitely better than the impact several missed or late payments will have.

Although it can be difficult for borrowers to change how their lenders will report, or in some cases not report, the loan modification to the credit bureaus, it is always important to be aware of this information. Simply asking the lender how this information will be reported will at the very least make borrowers aware of the impact the agreement will have on their credit score. This will help them to make an education decision about whether or not a loan modification really is the best option for their particular situation. In some cases, budgeting in other ways may be the best choice, while in others, a loan modification really may be the only answer. Even if the modification does have a negative impact on one’s credit, borrowers who are aware of this will have the upper hand. This is because they will be able to take other actions to correct the poor credit and to improve their credit scores. Talking to a financial counselor is a great way to begin rebuilding lost credit and improving a negative credit score. Many of these counselors work for free, so “hiring” one does not have to cause the debtor to incur any more fees or costly payments.

What is really important is for borrowers to make decisions based on what actions will have the most impact on their credit score in the long run. A short period of being in debt is not as detrimental to one’s credit as a long battle with debt that one cannot get out from under. If a loan modification will help the borrower to eventually be debt free, this will end up being better for the borrower’s credit score in the long run. Carefully considering and weighing all the options and getting as much information as possible is essential in improving one’s credit score, with or without a loan modification.

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