Most people who enter a debt management plan have already affected their credit rating by having extreme debt and high balances on credit cards and by making late payments. A debt management plan will affect your credit score, but not as much as you may think. The company that compiles FICO credit scores has not factored credit counseling information into credit scores since 1999 and takes the position that people should not be punished for entering credit counseling.
Debt Management Plans
Debt management plans begin with consumer credit counseling. Credit counseling agencies often recommend these plans to people who have extreme debt, are having problems meeting their obligations and who need help paying off their debt. The debt management plan may result in lower interest rates and accounts being re-aged to eliminate past-due balances. The consumer makes one monthly payment to the credit counseling agency, which is responsible for distributing the money received to the client's creditors. Most people can pay off their debt through this type of plan within three to six years.
Debt Management Reporting
Your creditors continue to report your monthly payments while you are enrolled in a debt management plan. They may also report that your payments are being made through a credit counseling agency. These comments will remain on your credit report until you have paid your balance in full. They do not affect your credit rating.
Late Payments
Late payments hurt your credit score, so make your debt management payments on time. It is equally important to monitor the credit counseling agency that is paying your creditors. If the agency makes late payments or fails to make payments on your behalf, it is your credit that is affected. Those payments will be reported as late on your credit report and lower your credit rating. If you discover a problem with payments being made by the credit counseling agency, report the agency to your local consumer protection agency and the state attorney general's office and file a complaint with the Better Business Bureau.
New Credit
Although a debt management plan does not affect your credit score, it does appear on your credit report. It may be more difficult to qualify for new credit while you are enrolled in the plan. Some creditors may think you have more debt than you can afford and deny your application. Others may consider the debt management plan a responsible decision that shows you take your obligations seriously and intend to repay the money you owe.
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