Yes, it does. Mortgage and some other types of debts can help you in building financial health. However, too much debt can cause many significant financial problems. If you are struggling to repay your debts, a debt management program is an option available to you. Is it a good option or bad option?
Debt management companies can save you from declaring bankruptcy or defaulting on your credit. However, a debt management plan can have a negative impact on your credit.
If you are considering a debt management program, you should understand it works. You should also be aware of the benefits and drawbacks of working with debt management companies.
How does a debt management plan work?
First of all, you need to find a credit counselor to review your financial situation. If you and the counselor agree that you should go for a debt management plan, the counselor will initiate negotiations with your creditors.
The counselor will then try to reach an agreement with them on reducing monthly payments, interest rates, waive fees or the amount you owe. If they agree, you can start making monthly deposits with the debt management company. These payments will be used to pay your unsecured debts. You will need to be diligent about agreed-upon monthly payments. You will also have to close your credit accounts.
What type of debts are included in a debt management plan?
A debt management plan does not include all types of debt. The debts it includes are:
- Credit cards
- Collections accounts
- Personal loans and some other unsecured loans
Debts not included in the program:
- Mortgage
- Home equity loan
- Auto loan
- Student loan and other secured loans
What are the benefits of a debt management program?
A good debt management program can provide you with the following benefits:
- All payments consolidated into a single monthly payment.
- Reduced monthly payments, interest rates, fees.
- No more collections calls and letters.
- Having a definitive date when you will be free from unsecured debts.
How does it affect your credit score?
Although a debt management program is not a factor considered in credit scoring models, it does affect your credit score. A debt management plan affects other aspects considered in these credit scoring models.
You are paying less than the actual amount you owe. You are also closing your credit card accounts. Closing credit card accounts changes your credit utilization ratio. This ratio is the comparison between the available amount of credit and the amount you are using. Closing credit card accounts lowers the available amount of credit. As a result, this improves your credit utilization rate. This leaves a negative impact on your credit score.
The way your debt management company works can also impact your credit score. It is the debt management company paying to the creditors. If the company does not pay on time, this will appear on your credit report as late payment or missed payment. As the debt management plan is covering many debts, each account included in the plan will reflect the late payment.
Though indirectly, your debt management plan does affect your credit score. So, you will have to figure out what is more important, debt management or maintaining a good credit score?
