How a debt-management plan affects credit
Signing on for a debt-management
plan may give you more breathing room in your monthly budget, but
will it hurt your credit? Not as much as you may think. Using
a debt-management plan to pay off debt won't hurt your credit score,
but it may make it difficult to qualify for new credit.
When you enroll in
a debt-management program, you write a monthly check to a credit-counseling
agency and the agency pays your creditors. A debt-management plan
usually lasts three or four years. A comment stating that you're
paying an account through a credit-counseling agency appears on
your credit report and remains until the account is paid in full.
Such a comment won't hurt your credit score in the least.
Since 1999, Fair,
Isaac and Co. has ignored any credit counseling information when
calculating a consumer's credit score.
think consumers who participate in credit counseling shouldn't be
punished in their FICO scores," says Craig Watts, consumer
affairs manager for Fair, Isaac and Co. based in San Rafael, Calif.
in a debt-management plan could make it difficult for you to qualify
for additional credit, and some debt-management plans prohibit consumers
from applying for new credit anyway.
may see that a person is in a debt-management plan and decide that
they have all the debt they can handle," says Maxine Sweet,
vice president of consumer affairs for Experian. Other creditors
might view participation in a debt-management plan as a positive
step, a sign that a consumer has taken responsibility for and is
serious about paying off debt.
The more a creditor
bases a lending decision on a consumer's credit score, the less
a consumer's participation in a debt-management plan is likely to
"A typical creditor
uses the scoring model. They don't look at the comment. They look
at the scoring," Sweet says. Paying off a big chunk of debt
on your own or with the help of a debt-management plan will give
your credit score a boost.
What will hurt your
credit score? Being 30 or 60 days late with any payments. Those
negative marks hurt your credit score and can mar your credit report
for up to seven years.
"The late pays
hurt, not the comment that they're paying it through a counseling
program," Sweet says. And that's why it's so important to choose
a debt-management program carefully. If the agency administering
the program misses or is late with a payment, it's your credit record
that gets marred. Plus, enrollment and monthly fees for debt-management
plans vary widely. Some companies may charge several hundred dollars
for their services; others charge monthly fees of $20 and less.
With a debt-management
plan, a consumer usually gets reduced interest rates, lower monthly
payments, no more late fees and fewer calls and letters from creditors.
Debt-counseling agencies get their operating money by receiving
a percentage of each client's payments back from creditors.
If you're current
on your bills, you may want to try negotiating new payment amounts
and lower interest rates with creditors on your own. You never know
what kind of deal you may land. And you may be able to make real
headway on your debt by simply tightening your belt for a few months
and freeing up more cash for debt payments.
If your situation
is more serious or you just feel plain overwhelmed, you may want
to talk to a debt counselor. If you decide to sign on for a debt-management
plan, be sure to monitor your credit bills carefully. Is the agency
paying your bills on time as promised?
"They need to
look at their statements," says Carol Wagner, a certified credit
counselor with Consumer Credit Counseling Service of the East Bay.
"They need to be vigilant."
If you discover a
problem with bills paid through a debt-consolidation company or
credit counselor, report the company to a local consumer protection
agency or state attorney general's office. You can also file a complaint
with the Better
Contact your creditors
and explain what happened. Your credit record is ultimately your
responsibility. Regardless of who made the mess, you'll have to
clean it up.