Effects Debt Management Places Have on Your Credit Score

Some people may be concerned that the effects debt management companies have on your credit score could be just as bad as filing for bankruptcy. While using a debt management company may not be the best option, there are different ways that a debt management company will affect your credit score. These are both good and bad, so it is up to each individual to decide what is right for him and his personal credit score.

Function

The function of a debt management company is to negotiate with your creditors. They negotiate the interest rate as well as the amount that you actually owe. These debts are put into a lump sum so that you may pay a smaller amount monthly rather than struggling to pay minimum amounts on each debt every month.

Effects

According to My Fico (myfico.custhelp.com), your Fico credit score is not going to be significantly affected by using the services of a debt management company. If you are seeking the help of a debt management company, your credit is likely to be affected already. A debt management company may affect your credit score negatively but that affect will be minimal. This will occur because rather than paying the full amount owed to your creditors, you have instead settled for a lower payment, which can have a negative effective on your credit. However, in the long-term, the positives of managing your debt far outweigh the negative.

Benefits

A debt management company is going to help you to pay off your debts faster because the payments will be less, the money owed will be less, and the interest rates will be lowered. This means that eventually your credit score will improve.

Time Frame

The time frame is up to you and the debt management company you choose to work with. However, just like a bankruptcy, debt management can have an affect on your credit for several years. This is due to the fact that your creditors will be reporting your activity with them as long as you are doing business with their company. Once your business is done, this activity will stay on your credit report for seven to 10 years.

Warning

A debt management company can negatively impact your credit score if you fail to follow through with making your designated payments. While the debt management company makes payments to your creditors, you must provide payments to the debt management company. The debt management company has no affect on what your creditors report to the credit bureaus.

Potential

There is a lot of potential in debt management companies in helping you improve your credit score. It is up to you to work with the debt management company to improve your own score; they cannot do all of the work for you. If you do it right, then you will eventually see an improvement in your credit score.