Thursday, July 25, 2002

The Effect of Debt Management on Credit

If you watch any television at all, you have probably seen advertisements from companies claiming they can help get you out of debt by working with the credit card companies on your behalf. These companies specialize in debt management. The programs they offer may be the solution if you're over your head in debt. However, one of the mysteries about debt management programs is how they affect your credit.

Credit Basics

    Your credit file is one of the most important pieces of information associated with your identity. Good credit gives you easy access to credit and the best interest rates. On the other hand, bad credit can make it impossible to get a loan, a credit card or even an apartment or job. The mistakes you make now will stay on your credit report for the next seven years, so any credit issues you may currently face can haunt you for years to come.

Debt Management Basics

    People often confuse debt management programs with debt settlement programs, which attempt to reduce what you owe. In a debt management program, you'll pay back what you currently owe to all of your creditors, but you'll do so at reduced interest rates. The debt management program pays all of your bills on your behalf with money you give them on a regular basis, so you don't have to worry about missing a payment. The goal of debt management is to wipe out all of your unsecured credit card debt within five years.

Debt Management and Credit Reports

    One of the main reasons debt management is preferable to debt settlement is your credit report will show that your accounts as paid in full, unlike a settlement, which is less desirable for obtaining future credit. The impact on your credit report is more favorable as well. According to Bankrate.com, the credit bureaus mark your accounts with a note that you are paying them through a debt management program. This remark goes away once you pay the balances. This does not affect your credit score. However, some factors directly resulting from your participation in the debt management program can affect your credit.

Closing Accounts

    The biggest reason why many people are iffy about debt management's impact on credit is it requires you to close out all of your credit accounts. This means that you cannot use any credit cards while you're on the program and the accounts will not be available to you once you finish. The age of your accounts comprises 15 percent of your credit score, and since the program will close out your accounts, your credit score will suffer as a result.

Timely Payments

    Though closing your accounts may negatively affect your credit score, a consistent record of timely payments will help your score. This is one of the aims of debt management. Since you'll be paying on time every month you're in the program, you will build up a nice history of current payments. This will diminish the impact of any late payments you may have made in the past, as it shows you're becoming more responsible. Your payment history makes up 35 percent of your credit score, so improving this area can drastically help your score. It will also offset the hit you'll take by closing your accounts.

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