Debt reduction plans are plans that people can enter into to help eliminate large debts. One of the reasons that many people hesitate to get into this type of program is because they fear that doing so could damage their credit. The direct credit impact from this type of program may not be as negative as you think, depending on what type of program you get into.
Function
A company that specializes in debt reduction or debt management plans works with people who have large amounts of debt. If you have credit card debt, medical bills or other types of debt, you can sign up with one of these companies for help. These companies will generally negotiate with your creditors to lower your interest rates and payments; certain companies also negotiate debt settlements for a fraction of what you owe.
Types
There are different types of debt reduction programs that you could choose to enter into. Some programs are referred to as debt management plans. These plans take a monthly payment from you and distribute it to your creditors. This type of plan can get you a lower interest rate and long-term savings. Other plans use debt settlement as their main strategy. With this method, they negotiate with your creditors to take a lump-sum payment. The creditors will take less than what they're owed to settle the account.
Negative Impact
With a debt management plan, you have nothing to worry about when it comes to the negative impact on your credit score. According to Bankrate.com, "Since 1999, FICO has ignored any credit-counseling information when calculating a consumer's credit score."
Debt settlement programs tend to have more of a negative impact on your credit score. Settling a debt could potentially lower your credit score by as much as 125 points if you had a high score to begin with.
Benefits
By entering a debt management plan, you could potentially help your credit over the long term. If you were at risk of missing payments on your accounts, the debt management plan could help you maintain a higher score. The effect of missing payments can be devastating to your credit file; a debt management plan helps ensure that you're able make your payments. These programs can also benefit you by giving you some flexibility in your monthly budget.
Considerations
When signing up with a debt reduction company, investigate the company thoroughly to make sure that it's legitimate. You could use the Better Business Bureau as a resource to see if there are any complaints against the company. If you sign up with a company that doesn't actually make your payments as agreed, it could end up hurting your credit score. This makes it essential to choose only companies that have a decent reputation in the industry.
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