Will entering nonprofit credit counseling or a debt management consolidation hurt my credit score?

Periodically I will post my responses to the most Frequently Asked Questions that I receive. I plan to include links to other sources that support my response, and you are welcome to comment and post others that you feel either support or refute me. I'll be the first to admit that there are so many variables that might affect an answer that don't presume to have the ONLY RIGHT answer. I am perpetually learning in this business because the only thing that remains constant is change (as someone else once said).

Will enetering nonprofit credit counseing or a debt management consolidation hurt my credit score?

Since whether or not you participate in a debt management plan is not a factor in the FICO scoring model, then entering such a plan IN ITSELF won't affect your credit score. However, because it may take your creditors some time to approve the terms of your dmp, if you pay the reduced program payment or pay after your normal due date before your plan is approved, you will most likely be reported t credit bureaus as late, incur fees., and accumulate a past due balances. any lates or past due will negatively impact your score of course even when paid through the dmp company.

It i easy to see the advantages of the dmp when you have fallen behind or when falling behind is inevitable due to reduction or loss of income. The lower payments, waived fees, an reduced interest that you often get on these plans may be the only way to avoid financial disaster no matter what happens to your credit score. Obviously if you are current on your payments and have the ability to continue paying as agreed, you should contemplate heavily whether the benefits of the dmp plan outweigh the negatives.

Some of the considerations that might suggest that a dmp is still a good option for a cu rent client would be:

• If you have high balances, are near or over your credit limit, or can only afford the minimums. At best, paying only the minimums on credit cards or revolving lines of credit will take you around 10 years to pay off and depending on your interest rates could take double or triple that time.
• If your creditors have suddenly started raising your rates, lowering your credit limits, or closing your lines of credit. This indicates something about your usage and/or payment history on this or any other account triggered a red flag that you may be overextended or headed for distress.
• If you have high interest rate. For example, at 18% APR if your creditor is billing you 2% of your balance (average in industry) , then 75% of that minimum is going straight to interest. Then if you add late fee or over limit fee, in many cases your balance might be going up even if you make a payment that month.

The bottom line is that, if you fall into any of these categories, your score is probably already dropping whether you realize t or not. In these case, improving your overall financial health and NOT obsessing on your credit score should be your priority.

Now if you are current and do not fall into any of these categories you mat want to consider any of the following as alternatives to the dmp:

• Call your creditors to request in-house programs that may be available
• Borrow from family to pay off bills then pay family back
• Self-Help. Check out one of the recommended books available in our online store or your library. Take a money management course online or in person. Check the Online Credit Coach calendar or call me at 866.416.5952 to schedule a FREE seminar for your organization or group.
• Unsecured consolidation loans if you can find one with terms more favorable than those on current accounts.
• Secured consolidation loans where you use car or home or other valuables for collateral

I will discuss these options in future posts.

You may want to check out thee inks fo more information:

MyFico.com FAQs about DMP and Credit Score

Federal Trade Commissions Knee Deep in Debt