Do Debt Management Companies Hurt Your Credit Rating?

You may be concerned that debt management companies hurt your credit rating, but it is important to remember why you originally made the decision to enter a debt solution. It is a way of making your unsecured borrowing arrangements more affordable. It is a recognition that a change needs to take place in order to make income and expenditure balance.

Do Debt Management Companies Hurt Your Credit Rating?

Breaching or amending the terms of your credit agreements will have negative ramifications for your credit rating. However, if you have already missed or made late payments on existing agreement, this is not an issue as your credit rating will already be adversely affected. Whilst it will hurt your credit rating if your payment history has always been immaculate, sooner or later the income/expenditure imbalance will, in any event, damage your FICO score.

What Do Debt Management Plans Offer?

A debt management company (also known as an intermediary) will help you to reorganize your finances to see what you are reasonably able to offer to your creditors each month. They will then be offered a reduced sum of money each month that is payable until the debt is cleared. To aid with this process, they are often able to arrange to freeze interest payments and any further charges.

Unsecured Debts Only

This debt solution will reorganize unsecured debt, such as credit cards and medical bills. It is not possible to restructure debt that is secured on your home or car. This is because creditors have collateral which gives them greater powers to recover any money that they are owed in the event of default. Filing for bankruptcy under chapter 7 or a loan modification may offer a better debt solution for those struggling to pay the mortgage. Remember that not just debt management companies hurt your credit rating.

Affordable Monthly Payments Without Creditor Harassment

Instead of making multiple repayments, a single payment is made and this will be disseminated to creditors on a pro rata basis. All negotiations with creditors will be handled by your intermediary in return for your monthly fee (about 10% of cumulative monthly contributions). Although the agreement isn't legally binding, it helps to prevent unwelcome creditor contact and harassment.

Debt management companies hurt your credit rating, but only if you have not previously had any credit indiscretions. What they do offer is a way of simplifying finances that also helps to clear debt, possibly without the accrual of further interest or charges.

Disclaimer: This article in no way attempts to provide legal, financial or tax advice. One should consult a licensed attorney, tax advisor, or other qualified financial professional before proceeding.