How Does Loan Modification Affect Credit Ratings?

by tammy on April 18, 2010

If you have found yourself in debt or are having trouble making mortgage payments, you may be wondering how a loan modification would affect your credit rating. If you’re like most people, you may be skipping over this option for fear of what it will do to your credit score, but you should know that the impact on one’s credit score is not always damaging or permanent. While the initial effect on your credit score may be negative, a loan modification agreement is always a better option than foreclosure and may even have a positive impact on the credit score in the long term. Long term effects are, after all, what matters the most.

Loan modification agreements are not reported in the same way by every lender. You cannot change how your lender will report the agreement to a credit bureau or what effect, sometimes negative or sometimes no effect at all, it will have on your credit score, but you can do something about this impact in the long term by meeting all the terms of the loan modification and making payments on time. Doing so will enable you to build up your credit score again and possibly make it stronger than it was before you began having financial difficulties. When credit is rebuilt, it is almost as though the debtor never had any debt in the first place. In fact, many lending institutions will look favorably on someone who has had debt and paid it off, as this shows that the borrower, though he or she may have some difficulties, honors his or her commitments and pays them off on time.

You should always ask your lender how it will report the loan modification agreement to the credit bureaus. If you are aware of this and of what effect it will have on your credit score, you will know if you need to take additional steps to improve your credit score. In some cases, speaking with a free credit counselor can be a very helpful tool in building or rebuilding your credit score. These professionals can help you to make smart decisions that will positively impact your credit, no matter what state it may currently be in. They can also clue you in to small, easy things you can do to boost your credit rating on an almost daily basis.

Debtors should be careful to make decisions that will have a long term positive effect on their credit scores. Usually, the only alternative to a loan modification is foreclosure, and foreclosure leaves a very hefty dent in your credit score that can be almost impossible to recover from. With a loan modification, even if you do have to suffer the temporary drawbacks of a poor credit rating, it will be much easier to pick yourself and your credit score back up. No matter what you situation, be sure to research all your options and to make a smart choice for you and your lifestyle.

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