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By Lucy Lazarony • Bankrate.com
Signing 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 credit
score.
"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 Business
Bureau.
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.
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