Debt Management & Your Credit
If you’re considering a debt management program, one of your biggest questions is likely to be how enrolling in the program will impact your credit and credit scores. It makes sense, considering the last thing you want to do in trying to solve your financial problems now is to cause more problems down the road by ruining your credit. While some debt relief options can definitely hurt your credit, such as debt settlement and bankruptcy, a debt management program may actually help improve your credit over time, depending on your situation.
Everyone’s financial situation is different, so you would only see an improvement in your credit rating given certain conditions and considerations. A certified credit counselor can assess your debts and even check your credit report for you to weigh the potential impact of enrollment in the program on your credit. Give us a call at to speak with a certified credit counselor today. You can also complete our Free Debt Analysis online and a counselor will call you shortly.
Stop credit report penalties
The first factor a debt management program can help improve when it comes to your credit is eliminating the penalties listed in your credit report. Every time you make a late payment, miss a payment, pay less than the amount requested, or go beyond your credit limit, you incur a penalty on your credit report for that account. Delinquent accounts have different designations based on how long the account has been delinquent and whether or not a settlement has been reached on how payments will be made.
By enrolling in a debt management program, you stop further penalties from being applied to any account included in your debt management program. Generally most creditors will even agree to bring already delinquent accounts current after you make 3-5 payments on time through your debt management program. By eliminating penalties, you improve your credit report.
Restore APR on credit cards
While it doesn’t specifically have to do with your credit report, enrolling in a debt management program can help you restore previous APR (interest rates) because you incurred any penalties for late or missed payments. Creditors often have a penalty APR rate which they assign to your account when it goes delinquent and in many cases, this rate is considered permanent. A credit counselor can negotiate with creditors to restore your original interest rates, as well as to waive any penalty fees.
Improving 2 factors used to calculate credit scores
There are 5 factors used to determine your FICO credit score. Each factor has a different “weight” assigned, which means some factors are more important than others to determining your score:
- Payment history (35%)
- Total debt currently owed (30%)
- How long you’ve had credit (15%)
- How long since your last credit application (10%)
- Types of credit you are using (10%)
Successfully completing a debt management program helps improve the first two factors which carry the majority of the weight in determining your credit scores. You improve your credit repayment history during a debt management program with every on-time payment you make on your debt management plan. In addition, each payment you make also reduces your total debt owed. Since these factors account for 2/3 of the weight in calculating your credit scores, improving these two can go a long way to improving your credit.
For this reason, many consumers who complete their debt management program actually see an improvement in their credit score rather than a decline. Keep in mind, everyone’s situation is different so what impact you see on your credit from a debt management program will largely be determined by factors like the original strength of your credit rating, how current or delinquent each of your accounts were prior to the program, and whether or not you included all of your debts in the program when you enrolled and/or remained current with all your monthly obligations during your program.
By in large, most of the clients we enroll in a debt management program either maintain or improve their credit score and their credit history as they pay off their debts much faster than they could using regular means. If you’re still not sure how a debt management program will affect your credit specifically, call to speak personally with a certified credit counselor. You can also get started online by taking a Free Debt Analysis.