InvestingHow Does Consumer Debt Counseling Services Affect My Credit Score?
If you are already underwater with debt, it is likely that your credit score has taken a hit for the worse. When you fall behind on current credit obligations the lenders will report these defaults to the credit bureaus. When people fall way behind on their bills its often impossible to ever catch up. Debt management programs have been around for years and offer help to individuals trying to get out of debt. How do they work and how will enrolling in one of these plans affect my credit score?
They usually begin by setting up an initial consultation. Here a financial counselor will break down your income, living expenses, debts and discuss strategies to reduce spending and allocate more money to paying off your creditors. At the end of the meeting you are given a budget along with an action summary plan to help initiate your route to financial freedom. Many find that this one time meeting is enough and the advice of the counselor can be handled out on their own. Others see a benefit in actually enrolling in the debt management program.
A debt management plan is a reasonable way to resolve credit problems and get back on track financially. Your financial counselor will act as an impartial intermediary. Based on your income they will negotiate and establish a mutually accepted repayment plan with your creditors. Upon agreement, you make a single payment to the debt management company and they in turn make the monthly payments to all creditors that were enrolled in the plan. Best case scenario is that collection calls stop and ultra high interest charges and fees are reduced or every now and then eliminated altogether.
There are pitfalls to enrolling in the debt management plan. We have experienced many situations where the creditor accepted the plan, stopped collections calls and even reduced the interest but would not report the monthly payment to the credit bureaus as the minimum monthly payment. More than likely the new monthly payment to the creditor is less than what it was before as a result of the restructuring program. Each month the creditor could be reporting you 30 or more days late because of it. You'll have no way of knowing it unless you frequently monitor your credit report.
If you are one of the many people in need of restructuring your debts be sure that you enroll in one of the credit monitoring plans available through Experian, Equifax and Transunion.