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Can debt management damage your credit rating?

Today’s post is by my guest Michelle Davis. Michelle is a contributory writer for Oak View Law Group. She is also a financial advisor and guest author for acclaimed blogs.

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Consumer debt has been a major headache for the U.S in the past few years. Actually, the Americans fall too easily for the “buy now, pay later” slogan which the credit card companies are so fond of using. As a result, credit card debt in the U.S is currently $886 billion as per the most recent estimate by the Federal Reserve.

 

People who are drowning in credit card debt often enroll in debt management programs. However, they are often apprehensive about the effect of debt management on their credit rating. Does debt management hurt your credit score? Let’s discuss in detail.

 

How does a debt management program work?

 

With a debt management program (DMP), you negotiate with your creditors for a restructured payment plan and a lower the interest rate. You can either deal with the creditors yourself or contact a debt relief company/credit counseling agency to get the job done.

 

How does debt management affect your credit?

 

DMP would not hurt your credit seriously: While calculating your FICO score, it is not seen whether your account has been a part of a DMP or not. Steve Bucci of bankrate.com correctly points out that your FICO score would not take a hit just because you have enrolled in a debt management program.

 

DMP is not a debt reduction program like debt settlement or bankruptcy. You are paying back the original amount to the creditors through an affordable payment plan. Therefore, your credit rating would not take a major hit. Remember that your credit will be severely blemished if there is a reduction in the principal amount.

 

Minor damage to your credit is unavoidable: With a DMP, you are moving away from the original terms and conditions of the loan. In a way, you default on the loan. So the creditor would report it to the credit bureaus. This would have a negative impact on your credit report. The negative statement due to DMP can stay on your credit for six years and make it difficult for you to obtain credit on favorable terms in the future.

 

It can be argued that most people who enroll in a DMP have already missed quite a few payments. So their credit is already damaged. Therefore, opting for debt management will not make a major difference to them in terms of credit score. Finally, a debt management program requires you to make timely payments over a certain period of time. This improves your credit score.

 

What happens if you do not enroll in a DMP?

 

A debt management program can successfully get you out of debt with minor damage to your credit. On the other hand, if you continue without enrolling in a DMP then you might sink deeper in debt. This might force you to settle your debt or file bankruptcy. Both the options will severely damage your credit score.

 

If your debts are manageable then debt management can be the right choice for you. It won’t ruin your credit rating like many other debt relief options. However, you should keep in mind the above points and analyze your financial situation before making your move.

 

Michelle


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