I have been a financial counselor for over two years, and here’s one question I often receive from clients: if I implement your debt management program, how will this affect my credit score? People ask this because they wonder whether getting outside assistance to handle their debt could potentially be a strike against their credit.
Well, my response is simple. I can’t tell you exactly how it will affect your score as each client’s situation is different. Also, you should note that credit counseling agencies don’t report your participation in debt management programs to any credit reporting agencies. We are an advocate for you and represent you, as counselors working with your creditors (on your behalf) to get you benefits such as lower interest rates, lower monthly payments, and assistance when you want to get out of debt.
You can check out the myFICO.com web site for a discussion on this matter. In the myFICO site’s education area, they explain that a credit counseling program has no impact on your score and isn’t a factor in generating your score. But let me try to give you more specifics on how a debt management program can impact your credit, because in reality, this topic deserves a longer explanation:
How Debt Management Programs Affect Your Credit Score
What To Watch Out For In A Debt Management Program
A credit monitoring service can help you track your credit history through your report and score. Through these reports, you can check the “length of history” of your accounts (or how long you’ve owned them), which is a category that makes up about 15% of your credit score. Now once you’re on a debt management program, expect your creditors to close your accounts. When this happens, the “length of history” category of your credit score is affected, causing your score to go down. So in effect, it’s actually the closing of your accounts that decreases your score.
In addition, you’ll need to be careful about setting up your payment date through your debt management program. If you don’t set up your payment date correctly, you may end up with late payments to your creditors. Thus, always make sure you allow enough time for the creditor to receive your payments through the program.
You can also ensure that your accounts remain current by continuing to make your payments to the creditor until they confirm that your first payment with them has successfully posted (through the program). If you cannot continue to make payments, just keep an eye out for the ones that have gone 30 or more days past due. Know that once the past due time hits 30 days, this has a negative impact on your score because this event is reported to the credit bureaus.
Advantages of a Debt Management Program
A debt management program has many benefits. By placing your accounts on a debt management program, you’ll stop charging on the accounts and consequently, your interest rates are lowered. What does this mean for you? Well this will help you pay down your debt balance more quickly, eventually improving your credit score since the amount you owe impacts 30% of your credit score. By paying down outstanding debt, you’ll neutralize the hit on your credit score caused by your account closures.
I also practice what I preach. I’ve tried a debt management program myself to see how it worked. And what did I find? It was quite helpful! My interest rates were lowered. I made progress with reducing my debt balance and with increasing my credit score; I was actually able to raise my score by 30 points within the first three months of implementing the program. I’ve been completely pleased with the plan.
And here’s another development: within a few months of joining a debt management program, I applied for both a student loan and a car loan and was able to secure both without any problem. Perhaps this will assuage your concerns about joining a debt management program; however, if you are still unsure about how your credit score will be affected by such a plan, then weigh its pros and cons. That is, you should determine if this kind of program is a fit for you based on your own reasons and goals: if your goal is to get out of debt, then a minor dent in your credit score from closing your accounts should still be worth the experience of becoming debt free!
Contributing Writer: Selena