Does Working With a Debt Management Company Affect Your Credit Score?

Both debt settlement companies and credit counseling agencies offer debt management services. Depending on your specific financial situation, counselors for both types of agencies contact creditors and attempt to settle your accounts and negotiate acceptable payment plans. While each company's policies differ regarding how consumer debts are handled, working with a debt management company to get your debt under control can impact your credit score.

Withholding Payments

Debt management companies often advise consumers to stop making payments on their debts in order to obtain a more favorable settlement. The rationale behind withholding payments is a valid one---creditors receiving regular payments have no incentive to adjust the debtor's payment plan or consider a settlement offer. If the creditor in question reports payments to the credit bureaus, however, withholding payments does severe damage to the consumer's credit score because the missed payment notations indicate that he is less likely to pay future creditors on time.

Settling Debt

Settling debt may provide you with partial relief from your financial burden, but it has an unpleasant effect on your credit rating. The credit scoring formulas view debt settlements negatively and if you participate in a settlement that your creditor reports to the credit bureaus, this will lower your credit score.

Unfortunately, settling a debt is sometimes worse for your credit than leaving the debt unpaid. When your creditor reports that your debt was "settled" this updates the negative entry for the debt on your credit report---making it appear more recent in the credit scoring formula and giving it a stronger negative impact on your scores.

Creditor Obligations

While some debt management companies have success helping consumers lower their debts and manage their existing accounts, creditors are not under any obligation to participate in any program. Because debt management companies charge for their services, you can pay for debt management only to discover that your creditors will not work with the service provider. This costs you money you could have put toward paying down your debt load. The longer you go without making a payment, the worse your credit suffers.

Considerations

Seeking out help managing your debts does not mean that you must sacrifice your creditworthiness in the process. Provided you continue making regular payments to your creditors, a reputable credit counseling agency can help you learn to better budget your income---making paying your creditors less of a burden without damaging your credit score.

Debt settlement poses a greater danger for consumers worried about their credit ratings. Although settling a debt hurts your credit, the Fair Credit Reporting Act notes that evidence of your settlement will only haunt your credit report---and score---for seven years before it disappears from your record.