How a debt-management plan affects credit
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
"Frankly, we 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.
Still, participating 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.
"Some creditors 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 matter.
"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.
-- Posted: Jan. 9, 2003