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Question: Does a debt management plan hurt your credit score?

(Posted by: knmardix on 2010-03-05 08:19:17)

I am thinking about getting credit counseling and enrolling in a debt management plan. But I want to know if it hurts your credit score. There seems to be so many scams out there right now.

Posted by: Jason on 2010-03-05, 13:37:32

Yes, participating in a debt management plan through a credit counseling agency will hurt your credit, though likely not as much as some other alternatives. However, a debt management plan will take longer, cost you much more money, and may not significantly reduce your monthly payments or balances (but interest rates will probably be reduced). Generally, you'll end up repaying 100% of what you owe, plus interest, but at a lower rate. Whether it's a good idea for you will depend largely on how much debt you have, your ability to afford the monthly payments, and how important your credit score is to you (and how much more you're willing to pay to try to maintain it). Let me give you some examples: Borrower #1 owes just $5,000 in unsecured debt. A debt management plan may be a good solution if he can afford the payments. He'll end up paying back the full $5,000 balance plus interest, plus fees to the credit counselor- but his credit should not sustain as much damage as had a debt settlement company withheld payments from his creditors for months or years, hoping to force a settlement. In this borrower's case, a debt settlement may have only reduced the balance by $1,000 - $3,000 dollars, which is a small consolation for having his credit score trashed. Plus, the fees to the debt settlement company would likely eat up a good portion of those savings. But let's look at a different example... Borrower #2 owes $70,000 in unsecured debt. Let's say the DMP (debt management plan) is able to reduce her interest rate from 19.9% to just 5%. On a 60-month plan, her monthly payment (not including credit counseling fees) would be $1,321. That comes to a total of $79,260 (plus credit counseling fees) to pay off that debt at the reduced interest rate under the DMP. Her credit will be damaged while she's in the program, but perhaps not as significantly as under a different type of debt reduction program. But what's the cost? Let's say another type of debt reduction program is able to resolve her debt for 45% of what she owes, with no additional interest accruing. That $70,000 debt is now able to be eliminated for just $31,500. And if she can manage to pay the $1,321 per month as she would under the DMP, her debt is eliminated in just 24 months (compared with 60 months in the DMP). So her credit is hurt for 2 years, but she's now debt-free, and has 3 years to repair and rebuild it by making all her payments on time. So let's look where Borrower #2 would be at the end of 5 years under each option... with the DMP, she has just made her last payment (totalling $79,260 plus fees), is now debt-free and emerging from her damaged credit profile. Under the alternate program, her credit report shows that she WAS way behind on payments 3 years ago (which significantly impacted her credit score), but has been debt-free and making payments on time for the last 36 months (which has helped to rebuild her credit). Oh, and by the way, she saved about $50,000 by choosing this option over the DMP. So you can see that it really depends on your individual situation whether a DMP through credit counseling is a good idea for you. If you only owe a small amount, it may be a good option. But if you have a significant amount of unsecured debt, you may want to weigh the additional cost of the DMP versus the savings that you can achieve through a debt resolution option. However, I DO NOT RECOMMEND CHOOSING ANY DEBT SETTLEMENT COMPANY, but not for the reasons that most people suggest. I’ll advise you not choose a debt settlement company because - even if you do (somehow) find a high-integrity, ethical debt settlement company - there is a far superior alternative: DEBT RESOLUTION. The concepts are similar, but because Debt Resolution is an attorney-managed program (as opposed to a private comany), it provides invaluable benefits that debt settlement simply can not offer, and at a lower cost. There isn't room to go over the differences here, but you can check out my answer to this question (copy & paste in a new browser window): answers.yahoo.com/ question/ index;_ylt= AhQIdMaQHurT6MMwgtm9FM7ty6IX;_ylv= 3?qid= 20100301082225AAYrSCm &show= 7#profile-info-s1OLajFVaa To find out more about how you can reduce your unsecured debt by 55% (guaranteed) and reduce your monthly payments by 50% or more, and do so while avoiding harassing creditor calls, surprise tax bills, and exorbitant fees, visit BetterThanDebtSettlement.com

Posted by: Judy on 2010-03-05, 08:25:09

It will hurt your score if its a debt negotiation or settlement company. The way they work is: They allow you bills to go unpaid even longer, to make the creditors scared enough to settle. In the meantime, you accrue more interest and late payments. Sometimes these companies don't settle (they don't have to), and you end up in court anyway. All of this ruins credit. The main complaint is that you pay these companies thousands of dollars and you get little in return. You can do all this yourself (if its a debt negotiation or settlement company). It's all in books - easy to understand with step by step directions on how to negotiate, settle, reduce payments, or reduce interest rates. Go to your bookstore (or library) and get a book on Debt / Credit Repair. It will be worth its weight in gold. There is also a non profit government agency called National Foundation for Cosumer Councelling. This agency should not charge more than $25/ month for their services. They work with your creditors and work things out. Reviews are excellent. NFCC.org - find a location near you, and make an appointment. I recommend the book first, since a major complaint is that going to a gvt councelling service is embarrassing and that they make you cut up your credit cards right there. /

Posted by: Bills.com on 2010-03-05, 12:53:23

While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy -- or using a third party to re-organize your debts. Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. It is important to understand that in a credit counseling program, you are still repaying 100% of your debts -- but with lower monthly payments. On average, most credit counseling programs take around five years. Another option is a debt settlement plan, but this too will negatively impact your credit. Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money. A way to consolidate your debt with a very small possibility of negatively impacting your credit is to get a debt consolidation loan. Many people think first of a debt consolidation loan when seeking debt consolidation. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt. It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation, if there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30-year loan, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is no credit rating impact. You must keep in mind that if you are having a financial hardship there are no solutions to resolve your debt, which will not impact your credit. I hope this information helps you Find. Learn & Save. Best, Bill

Posted by: Johny on 2010-03-05, 19:22:21

You can use this credit monitoring service to pre-estimate future scores for different scenarios of such payments - credit-report-score.10001mb.com