Financial problems can quickly affect your credit by causing negative information to appear on your credit reports and making your credit score sink. You have several options for dealing with those problems, either on your own or with professional help. Credit counseling agencies are a common source of aid, and credit counselors may recommend signing up for a debt management plan. This may help salvage your credit, although it cannot magically remove bad information.
Definition
A debt management plan helps to pay off debt within a certain time frame. It is created with a credit counselor's assistance, and the counselor may be able to get certain concessions from the lenders. These commonly include interest rate reductions, removal of over limit or late payment fees that have accrued and overall balance reductions. Creditors are often more likely to bargain with a counselor than directly with a consumer because they know there will be a structured plan and that the credit counseling agency will be administering the payments. The consumer pays the agency each month, which takes its fee and then distributes the rest of the money for the outstanding bills.
Effects
Many consumers have spotty credit reports before they start a debt management plan because they enter credit counseling due to financial issues. Past blemishes like missed or late payments stay on the reports for seven years. However, the report will improve once the debt management plan starts because payments from that point will be on time. Lutheran Social Services (LSS) explains that credits typically start reporting the account as current after three consecutive payments from the agency. Participation in a debt management plan will be noted on the credit reports, but it is not considered for credit score calculation according to LSS.
Time Frame
The positive effect of on-time payments will continue for as long as the debt management plan lasts, which can run up to five years according to the National Foundation for Credit Counseling. This will offset much of the past history, as credit score company FICO states that current activity is weighed more heavy than old information.
Benefits
The main benefit of a debt management plan is that it offers a structured way to improve credit as well as to pay off debts. Many consumers have trouble making and following their own budget. A credit counselor offers an objective point of view and helps in the budget creation. The consumer only has to make one payment each month and the credit counseling agency handles the rest, ensuring all accounts are paid on time so the payment history reflected on the credit reports will be good.
Warning
The Federal Trade Commission (FTC) warns that some credit counseling agencies are unscrupulous. They may not make payments on time, which hurts the consumer's credit because they show up as late on the credit reports and pull down the credit score. The FTC advises checking monthly statements from the agency to ensure the payments are being distributed as agreed and in a timely manner.
Member Comments