Debt management programs, typically referred to as debt management plans, assist consumers in paying off their debt under the guidance of a credit counselor. It's important to understand the effect debt management plans have on your credit score and credit reports, and what to look for in a credit counseling organization, so that you avoid damaging your credit further.
Debt Management Plan
The only way to qualify for a debt management plan (DMP) is under the recommendation of a credit counselor. After looking at your financial situation, a credit counselor may suggest that you use a DMP to get out of debt. Once you agree, the counselor negotiates with your creditors for lower interest rates or payoff balances, then creates a time line, at the end of which you will have paid off your debt. DMPs usually last three to four years. During that time, you make payments to the credit counseling organization, which in turn pays your creditors.
Credit Score
The appearance of a DMP on your credit report doesn't hurt your credit score. The credit scoring formula views it as taking responsibility for your debt, and therefore you aren't punished for it. Making a late payment has a much worse effect on your credit score; a payment made over 30 days late may sink your score by as many as 110 points, according to MSN Money writer Liz Pulliam Weston. Instead of hiding out as the collection calls come in, handling your debt through a DMP may actually save your credit score.
Credit Report
Although a DMP doesn't hurt your credit score, having it on your credit report may make borrowing difficult in the future. Some creditors view a DMP as a warning sign that you've had trouble with your finances in the past, or that your debt load is already too heavy for you to handle. However, Maxine Sweet, vice president of consumer affairs at Experian, points out that most creditors look primarily at your credit score to decide about lending to you, in which case a DMP won't hurt your chances of getting a loan. To improve your standing as a potential borrower, pay your balances down. A DMP may help you to do so faster.
Considerations
Since you pay the credit counseling organization and it pays your creditors, it's vital to choose a reputable credit counseling service. The website for the National Foundation for Credit Counseling includes a search engine to help you to find a trusted credit counseling organization in your area. Understand the fees associated with the services prior to making any agreements. If you're current on your bills, Bankrate recommends asking your creditors for lower interest rates directly and creating a payment plan for yourself.
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