Does Debt Management Ruin your Credit? Let’s find out

The basic qualities to look when you seek a debt consultant

Many people seek the service of professional debt management companies to come out their debt. A qualified debt management company can help you get out of debt and get a fresh start. This article on debt management companies covers the following:

  • How credit and debt management related?
  • What are the points to be noted before seeking the help of a professional debt management company?
  • How debt management companies can cause harm to your credit?

If you are in debt, you may consider signing up with a debt settlement company. You may have already heard that these debt management services can help you pay off your debt in just a few years. This is true – a qualified debt management company can help you get out of debt and get a fresh start. However, you need to be aware of the risks to your credit rating that come with debt management. As too many customers have found out, debt management companies hurt your credit unless you take steps to keep your credit rating safe.

Credit and Debt Management: What is the Connection?

Does Debt Management Ruin your Credit Let's find outYour credit rating is your credit history. Credit bureaus gather information about your debts and your history of repaying debts. From this information, you have a credit reputation that can help lenders decide whether you are a good risk or not. When your debt load becomes too large, you overextend your credit meaning that you take on more credit than is possible for you to easily pay off. When lenders see that you have a lot of credit, they become more hesitant about giving you loans. When your debts become truly a burden, you may start making late payments or you may stop paying some creditors entirely. This can seriously harm your credit rating. Debt management companies assert that they can help you get back on track financially, but that does not mean that your credit score will get better right away.

Your Credit Report and Debt Settlement

Your credit report will start to look different once you sign up with a debt management firm. The bills you are paying off will be marked as not being paid as agreed and your credit report may even show that you are using a credit help company to help pay your bills. While there is nothing wrong with that per se, lenders who see this on your report will see that you are struggling and will obviously be a bit more reluctant to grant you credit. Plus, many debt settlement companies make you sign an agreement stating that you will not take out any new loans or credit while working to settle your debt. In this case, then, your credit will matter less because you will not be taking out new loans.

In general, financial experts agree that because credit help and debt management start to affect your credit report right away, you should only use these services if you need to. If you have perfect credit, for example, but find your debts to be difficult to pay off, you may want to avoid debt management. After all, your perfect credit will slip a little as you try to settle your debt this way. On the other hand, if like many customers your credit is already suffering because of your debt load, then debt management will not lower your credit. In fact, good credit counseling can actually help you boost your score in the long run.

Unreliable Debt Management Firms and Your Credit

The biggest risk to your credit rating, however, is from disreputable credit help companies and unreliable debt management firms. There are many ways that such debt management companies hurt your credit, or even ruin your credit:

  1. Not paying on time
    If your creditors are not paid on time, they will hold you responsible, even if a debt management company is supposed to be making your payments. That means that if your payments are late you will be charged late fees, get credit report dings, and in extreme cases may have legal action brought against you.
  2. Taking a lot of your money
    Some disreputable companies will take so much of your monthly check that little will be left for your creditors, ruining your credit reputation further. Some of these companies will even keep some of your entire monthly contributions for themselves to pay for administration fees.
  3. Disappearing
    Some companies will take your money and will promptly disappear, change names and management, or simply close shop. You will be left with little money to pay your creditors – which can result in dings on your credit report.
  4. Not paying your creditors at all
    Some companies will put all your monthly contributions into an escrow account or trust account, presumably waiting until you have accumulated enough to pay what you owe. Of course, this enrages creditors since they may have to wait years to get their money. Some creditors have even sued customers who have signed up with such debt help companies, so read the fine print of your contract carefully.