If you?re struggling with your credit card payments, credit counseling companies might suggest a DMP (Debt Management Plan). This type of program should bring you some relief when it comes to your monthly payments. Creditors will agree to lower your interest rate and waive all late fees and penalties associated with that account. However, your account will be closed and you will no longer be able to open any new accounts throughout the duration of the program.
So how does a DMP affect your credit score? Many people have the misconception that your credit score will be ruined when you enroll in a DMP. According to Fair Issac & Company (company who created FICO credit score), enrollment in this program doesn?t have a direct effect on your score. There will be a notation on your account that states that you?re enrolled in a credit counseling program but this notation itself won?t lower your score.
As I mentioned, your accounts will be closed by the creditors. This means that your total DTI (Debt-to-Income) ratio will increase. Depending on what other accounts you have on your credit report, you could see an effect on your score. Therefore, it all varies depending on your exact credit profile.
Once you?ve completed the program, the notation should be removed. However, if you were behind or late on your payments in the past, those remarks can stay on your credit for up to 7 years. For someone who never fell behind on their payments and joined a DMP, your credit should be squeaky clean once you?re done!
So what can you expect from a DMP? Creditors will lower your interest rate anywhere from 0-11%. Some creditors actually have special hardship programs where they will reduce 10% of your principal balance to make your payments more affordable. The credit counseling agency will be in charge of disbursing your payments to your creditors every month. You should always double check your monthly statements to make sure they are receiving the payments on time. During this program, it?s important to always keep up with your payments. If you miss some payments, your DMP will be at risk! There is no pre-payment penalty for this type of program. If you can afford to pay extra each month, speak with your credit counseling company to arrange the payment.
Credit counseling programs are designed for those who are pro-active in getting immediate help without falling too far behind. If you?re struggling with your payments, always look at your different options such as debt settlement or bankruptcy.
Kevin is a certified credit counselor and co-founder of http://www.debteye.com/.
Debteye provides tools and resources to help consumers get out of debt without the use of expensive third party companies.
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Source: http://kiss101.net/do-credit-counseling-programs-hurt-my-credit-score/
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