Getting professional help for debt management alone won't cause your credit score to plummet. Debt management program enrollment is only one service offered by credit counseling organizations. These organizations take the responsibility of paying unsecured debt out of your hands and into their own and will often negotiate a lower rate of interest on outstanding accounts. You may have concerns that letting a credit counseling agency take the reigns affects your credit report. However, the truth about debt management programs that reduce interest is that your creditors, not your credit counselor, ultimately decide how to report your account activity to credit bureaus.
What Is a Debt Management Program?
Debt management programs allow you to methodically repay unsecured debt, such as credit card debt that got out of control. When you enroll in a debt management plan, you are required to make once-monthly payments entrusted to your credit counseling organization, states the National Foundation for Credit Counseling. The organization then distributes your money to your creditors each month, relieving you of making direct payments. Often, a credit counselor contacts creditors to negotiate reduced interest on account balances. Additionally, creditors may agree to waive late or over-limit fees.
Debt Management Program Details
Consumer Credit Counseling Service, a member agency of the National Foundation for Credit Counseling, says creditors are sent letters notifying them that a client has enrolled in a debt management plan through a credit counseling organization. Consumer Credit Counseling Service indicates that some creditors stop or reduce interest, but not all are amenable to negotiations. If you miss a monthly payment and the creditor does not receive payment from your credit counseling organization, interest rates can increase or resume. Late or delinquent payments also show up on your credit report.
Reduced Interest & Credit Scores
If you're considering enrollment in a debt management plan, concerns that your participation will affect your credit report are understandable. Consumer Credit Counseling Service explains that each creditor has its own way of reporting information to the three major credit bureaus, Experian, Equifax and TransUnion. The Fair Isaac Corporation website indicates that a notation in your reports from a creditor that you're enrolled in a debt management program should not affect your credit rating. But if your credit counselor takes certain actions, this may negatively affect your report. If you choose to participate in a debt management program, ask your credit counselor if your report is likely to be affected if he or she negotiates lower interest rates or asks creditors to waive fees.
The Grand Scheme of Things
Budgeting expenses so that debts are paid each month is the best way to prevent long-term damage to your credit report, notes the financial advisers at Credit.com. But if you're straddled with a hefty amount of debt or lack discipline to adhere to a budget, a debt management plan is a better option than those with a weightier, more long-term impact. For example, reports of debt settlement (debt negotiation) stay on your credit report for seven years--the same amount of time had the account balance been charged off or sent to a collections agency. Bankruptcy is reflected in your credit report for 10 years and significantly impairs your ability to get a loan or credit card.
Debt Management Survival Strategies
The National Foundation for Credit Counseling notes that most clients are enrolled in debt management plans for 30 to 60 months. During this time, they cannot apply for credit cards or loans unless it's an emergency. Nor can they purchase on credit, although the National Foundation for Credit Counseling notes that if an employer requires a credit card for business expenses, this might be an exception. It's not uncommon to emerge from debt management plans with an intact credit history. Many reformed debtors who complete debt management plans even go on to purchase their own homes.
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