The 2008 recession and rising unemployment caused many to fall behind on their debt, but companies are willing to help. In 2008, for example, Bank of America modified the accounts of 850,000 customers -- giving terms such as lowered interest rates. Loan modification, however, may have an adverse impact on your credit.
Identification
Loan modifications programs can hurt or possibly help your score. It all depends on how your creditor reports the loan to the credit bureaus. If, for instance, the lender accepts a reduced payment, it may appear as delinquent on your credit history.
Considerations
Some lenders require a loan to be in default before approving loan modification. Most require a loan to be at least 30 days past due, but some only offer loan modification to accounts at least 90 days behind. A payment 30 days late wont harm your score much, but a 90 day late payment will seriously damage your credit. Some credit counseling services even suggest stopping payment until the lender agrees to negotiate. Both scenarios could destroy your credit.
Benefits
Usually, loan modification is the best option if you cannot make payments -- even if it dings your credit score. Having a settlement on your credit report will probably hurt you less than constantly missing payments or possibly having the bank foreclose on a home or force you into bankruptcy, according to MortgageLoan.com.
Tip
You might want to refinance your home instead of seeking a loan modification. Refinancing means you repackage your current loan into a new one at a lower interest rate.
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