Debt management plans and programs (DMP), which can also sometimes be called credit counseling, is part of a rapidly growing industry. There are many companies and organizations who are now offering services and advice to consumers. You do need to be knowledgeable and have information about what to be on the lookout for and also the benefits that you can expect from a debt management plan.
1. Your credit rating may drop. Your scores may go down. However it is not a definite and you are not guaranteed to see lower credit scores. For example, if you have several late payments on your record or if you are significantly behind on any payments to a creditor or in paying any bills in general, then the chance is that debt management plans may actually improve your credit ratings. So while the consumer’s scores can sometimes go down, there are also instances in which it could improve as well, though this is not as common. It all depends on the information that is contained in each and every consumer’s accounts.
On the other hand, if you currently have a large amount of outstanding debt but if you are current on your monthly payments, in this case your credit score may actually go down when you enroll in a debt management plan. This is where most individuals fall. The decrease is because as your debt management company renegotiates your obligations, the company may need to change when your monthly payments are made to creditors, which then may potentially result in late payments being reported on your credit history. This would of course lower your credit scores.
In addition, some creditors may decide to close your accounts while you are in a debt management program. This can also decrease a rating as the person now has a lower borrowing capacity and higher percentage of debt that is on their record.. A score could also decline as if you had good history with those accounts, those positive records will be taken off your credit history
However, you need to think about the long term. Taking the action of enrolling in a debt management program is a long term decision, and you need to gather all the facts and information on them regardless of whether your credit score goes up or down in the short term. The bottom line is that repaying your outstanding obligations to any company is the best thing for your credit score over the long term. Doing this is defiantly better than continuing to be late on your payments or not paying your bills at all.
2. Consider both for profit and non-profit companies – Some debt management companies try to sell you on the fact they are non-profit. They may very well be organized as a nonprofit business, however the truth is that these companies are still in business to make money. So no matter who you deal with, always ask questions on the fees and costs involved in using their services.
The only difference is that they distribute their earnings differently than a for-profit corporation, but they still need to earn money from you. All companies, whether profit or non-profit, will charge you for their services, however it is usually as a modest monthly fee. But shop around for the best deals. Closely exam any enrollment costs, monthly fees, information provided to you, and other expenses that could be incurred.
3. You will need to give up new credit – These plans will stop you from opening new lines of borrowing or getting new credit cards. If you even try to open a new account, you will risk any of the benefits your debt management company and that the program has negotiated for you. So before you enroll with a non-profit or other provider, make sure you do not anticipate needing any new forms of borrowing money in the near future, such as an auto loan.
4. The DMP does not take immediate effect - After you make the decision, apply, and then enroll into a debt management program, it may take a month or two before your creditors receive their first payment from the process. So a couple things to keep in mind.
There are ways to help avoid late payments that could fall on your credit rating. It is a great idea to make at least one month, or maybe even possibly two months, of “double payments” on your bills before starting the DMP process. So in effect you will be making one payment to the debt management service and then you will also make one regular payment directly to your creditors. However, this may be difficult to do giving your financial situation, so if you can’t do this, you need to be prepared for the possibility of getting a late mark or a reduction of your credit score.
Also note that you may get a collection call from your creditors before they receive their first disbursement from the debt management agency as the program takes time to get underway. While the company that you select as part of this process can’t prevent collection calls, most collectors tend to be satisfied when you tell them you have enrolled in a DMP. They will usually cease their calls and leave you alone once you inform them of the plan.
5. Initiate your own debt management program - Rather than contract with a company to provide you with this service, you may be able to contact your creditors and in effect start your own plan. This is the so called DIY approach to a DMP. You can explore the information that is needed to start a credit card hardship programs, and also learn tips to negotiate with your creditors.
6. Charges and fees will be waived – Most DMP companies will be able to get your creditors to eliminate both any charges as well as future late fees that might be incurred as creditors adjust your payment schedule. Not only that, but many companies that offer this service will also eliminate any charges you currently have on your account, potentially saving you as much as $40 each month. This total cost savings what some people pay for the fees, so in effect using a DMP is free.
7. Your monthly interest rates will be reduced – After your debt management company proceeds to make contact and negotiate with your creditors, the vast majority of lending companies will immediately lower your monthly interest rate and some of them will lower it by several points. There are cases of people going from 20% down to rates between 12% and 16%. The exact reduction will depend on where the consumer started as far as their interest rate and the information that is provided to the lender. This is a huge help and savings if you are paying a high interest rate. These lower APRs can save you thousands of dollars in interest expense.
8. You can avoid bankruptcy – Nobody really ever wants to declare bankruptcy. A debt management plan provides people with a strong alternative to becoming legally destitute and filing. While even a successful DMP may still require this, the chances of it occurring are much lower.
That being said, it is interesting in that in debt management or a credit counseling program is a prerequisite to filing bankruptcy and the courts will demand this. So if you try a DMP, but still find yourself unable to keep up with your monthly bills, bankruptcy is still an option. You do not lose the ability to file for it.
9. Simplify your bills as you will have only one monthly payment – A quick and simple benefit of a debt management program is you will have the ability to consolidate your various payments. These means that all of the consumer’s loans, credit card accounts, and other sources of borrowing will now be covered by just one quick and easy to make monthly payment.
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