Debt Help: How a Debt Management Plan Affects Your Credit
Debt Management Plans and Credit Counseling Companies
Over the past several years, debt management companies and debt counseling services seem to be sprouting up everywhere.
There are a large number of these companies because so many people are looking for a way to manage their debt and return to a debt-free lifestyle as quickly as possible.
These credit counseling companies and credit counselors make a lot of claims to help you manage your finances and get out of debt quickly. If you sign up with one of these companies, they will likely "work out" a deal with your creditors.
This deal usually provides for lower monthly payments and a lower interest rate. You simply write a check each month and they distribute the funds to your creditors.
These companies will indeed help you get a lower interest rate and even lower payments, but as with most things in life, it's going to cost you something.
Basically you're trading one thing to get another. Sure, they make it easier for you to manage and pay off your debt, but your credit is likely to be trashed in the process.
Will a Debt Management Plan Affect My Credit Score?
The answer to this question depends on what you do and how you deal with the problem of your credit. Most credit counseling companies provide free services. The advice and guidance they provide will have no affect on your credit score because they are not involved in the process.
When a credit counseling agency handles your debt management, they step in as a buffer between you and your creditors. If your credit situation is out of control, you may require the serious help of a credit counseling to enroll you in a debt management plan.
A debt management plan is what most credit counseling companies offer.
When a credit counseling company has enrolled you in a debt management plan and they have made a deal to pay off your creditors while you make payments, that activity is going to show up on your credit history and may even affect your FICO score.
According to Fair Isaac, a company that is responsible for a lot of credit scores,
"Using a credit counseling service and having this situation reported in your credit report should not have any negative impact to your FICO® score. However, the actions you take based on the recommendations of a credit counselor may sometimes affect your score.
For example, choosing to make partial payments or agreeing to settle for less than the full amount on accounts may be regarded negatively by the FICO® scoring model. Additionally, any late payments occurring either before or after you began the plan may also be regarded negatively."
The bottom line is this: enrolling in a debt management plan through a reputable credit counseling service will indeed show up,on your credit report. This information may be regarded by some creditors as negative.
Qualifying for New Credit May Be More Difficult
Enrolling in a debt management plan through a credit counseling agency may get the debt collectors off your back and start you down the road to begin debt-free, but it may also make it difficult to get any type of new credit.
That could be a big problem if you need to purchase a car, looking for a new job, renting an apartment or want to purchase a home in the near future. Most debt management plans will prohibit your from qualifying for any additional or new credit.
Most creditors who would consider you for a loan or for credit will likely see that you're in a debt management plan and figure you already have all the credit you can handle.
On the other hand, some creditors may look at your participation in a debt management plan and see that as a step in the right direction. Whether that has a negative effect on your eligibility to qualify for new credit is entirely up to the creditor.
Late Payments Do Far More Damage to Your Credit
One of the most damaging things you can do to your creditworthiness is to make late payments.
While they may not seem that serious to you, a payment that is 30 or 60 days late can remain as a negative mark on your credit history for seven years.
If you are unable to make payments on time, then a credit counseling service may be the best option for you.
Enrolling in a debt management plan may have a negative effect on your credit history, but it won't be nearly as damaging as late payments.
Common Sense and Your Own Debt Management Plan
You don't need a credit counselor or a credit counseling service to get out of debt.
This lady has a very strong accent but explains one part of a debt management plan
You can easily create your own debt management plan and be on your way out of debt today.
All you need is some basic knowledge, a plan of attack and the ability to stick to that plan no matter what. There is no magic to this, it's just common sense.
Start by paying off your smallest debts first.
When you pay off that first small debt, simply allocate the money your WERE paying each month on that small debt and add it to the payments you're making on the next largest balance.
When that next balance is paid off, combine the payments from the first two paid balances toward the next largest balance.
This is called the snowball effect in paying off your debt. Use it and you'll be paying off all your debt in a short time.
Of course, the snowball method of paying debt is just one part of a total plan to pay off your debt and get to a place where you can be debt-free.
Debt Management Plans: The Bottom Line
If you're in debt and what to get out of debt, here is my suggestion to you. If you're able to make all your monthly payments on time and can afford to put a little extra toward those loans or credit cards, do that.
How to Make Your Own Debt Management Plan
1) Collect all your bills and determine how much debt you owe.
2) Make a budget and determine how much money you can put toward your debt.
3) Contact each creditor and make an offer to settle the account. You may want to negotiate for a lower amount, ask that interest fees or other added fees be waived. You may even offer to pay a lump sum in return for a reduction on the total amount owed.
4) Some creditors will restore your account and waive interest fees or penalties in return for your assurance to make any future payments on time. Other creditors may discount the total amount owed in return for a lump sum payment. Keep in mind that any debt that is forgiven will appear on your tax returns as income for the following year.
5) Get all changes - reduced principal amounts, waived interest or other charges - in writing form the creditor.
6) Make all agreed upon payments on time.
7) pay off your debt each month using the snowball method. Once the first creditor is paid off, use the money previously allocated for that payment toward the next creditor. As each account is paid off, use the money previously allocated from the paid accounts toward the unpaid accounts. You'll be spending the same amount of money to pay bills each month and paying off your entire debt much faster.
You can save yourself the fees charged by a credit counseling agency by negotiating your own deals and setting up your own payment plan.
Beyond that, there are many resources online that can help you to develop your own customized debt management plan.
First, create a budget. Next keep close track of where every penny is going. Allocate funds from the budget and use those funds ONLY for those budgeted items.
There are many ways to save money and make better use of your money by developing your own debt management plan. For example, did you know that paying just two extra house payments each year takes 8-10 years off a 30-year mortgage?
Double your mortgage payments by sending an extra payment (toward principal only) along with your regular monthly payment and your house will be paid for in just under 10 years.
Debt management plans can work and credit counseling agencies have helped a lot of people get out of debt, however, you can do the same things yourself with just a little research and willingness to work out some deals with your creditors.
Whatever debt management plan you decide to use, your credit is likely to suffer some dings in the short term while you're working out your plan. The main thing is to start a plan to restore your credit today. In the long run, restoring your credit rating is going to better for you and make your life a whole lot easier.
The information in this article is intended for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney, accountant or financial advisor to obtain advice with respect to any particular issue or problem.
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