By getting a DMP, you may be able to lower your interest rates and monthly payments, allowing you to pay off your debts and avoid the negative impact of defaulting or filing for bankruptcy. Because you pay off your original debt, managing a debt plan has a much smaller effect on your credit rating than debt settlement or bankruptcy.
One of the advantages of a debt management plan in terms of the effect on your credit is that you'll pay the full amount of what you owe to your creditors. A debt settlement option, on the other hand, involves a company negotiating lower payments for you that don't cover the full balance you owe. With a DMP, you'll eventually pay off your debt in full and, ultimately, that's what your credit file will show. The fact that you used a credit counseling agency to do so will not reflect negatively on your credit rating. The plan bundles your various credit card payments into one payment, can cut your interest rates in half, and provides you with a structured way to pay off the debt within three to five years.
However, certain aspects of the program: timely payments, account closures, smaller amounts due, and changes in the utilization rate can affect a person's rating both negatively and positively. If you have a debt management plan, the payment you make each month will normally be less than the minimum amount you initially agreed upon when you settled the debt. It's important to research the debt management company before accepting the terms or signing any documents.
In exchange for the benefits associated with your debt management plan (lower interest rates and reasonable monthly payments), you will be asked to close your accounts. Most people who abandon a debt management plan do so because they run into more unexpected financial problems once the program starts or because they feel that monthly budget restrictions are too burdensome.
After the first eight or 10 months of consistent monthly DPM payments to reduce the amount of debt, the percentage of credit utilization will decrease and your credit rating will increase. Most debt management companies require that you close credit card accounts, as those are often the cause of the debt.
If you decide that a debt management plan is right for you, it's smart to get help with budgeting and money management to avoid being left behind again.
A debt management plan can be an effective way to manage debts and improve credit ratings. However, it is important to understand all of its potential benefits and drawbacks before making any decisions. A qualified credit counselor can help you determine if a debt management plan is right for you.