Debt Management Plans Rarely Useful as Credit Repair Tool
By John Campbell
If you are deeply in debt, many credit counseling
agencies can assume responsibility for repaying
your debts and negotiating better rates and
reduced fees with your creditors. Reputable
agencies only offer these debt management
plans as a "weapon of last resort" if your
debt is becoming unmanageable.
Although debt management plans can help you
get out of debt in a set period of time, they
rarely help you repair your credit.
For starters, credit counselors aren’t
in business to improve your credit. The
best credit counselors will help educate
you to manage your money, pay off your
debts and develop a realistic working
budget that you can live off of. If you
opt for a debt management plan your credit
score will often remain the same, high
or low, and your credit rating could actually
be reduced.
With a debt management plan, you agree
to pay a credit counseling agency a lump
sum of money every month for a set period
of time, often 4 years or longer. The
agency takes over payment to your creditors,
allocating a percentage of your monthly
payment to each of your creditors. Your
credit score will go down if the agency
doesn’t make your minimum required payment
with each creditor or is late making a
payment. You are still considered fully
responsible for making your required payments
each month, even if you’re working with
a credit counseling agency.
Reputable credit counseling agencies
will be willing to provide you with up-to-date
statements of all payments made to each
of your creditors. Verify this information
with each of your monthly statements you
receive from your creditors to ensure
your debt is being paid in a timely manner.
If the agency you are working with claims
that certain creditors have agreed to
reduce your interest rate, waive late
fees or reduce other charges, you will
want to verify this information as well.
Before each of your creditors approves
any debt management plan that may be created
on your behalf you will need to continue
paying your minimum monthly payment on
your own. Any creditors that don’t agree
to the plan will have to be paid by you,
separate from your monthly credit counseling
agency payment.
If you successfully complete a credit
counseling debt management plan your finances
will likely improve but you may be surprised
to find out that your credit score has
not went up significantly, if at all.
Only time can improve your credit rating
in many cases. Any missed payments or
late payments, loans in default or other
negative financial information often stays
on credit reports for 7 years.
Debt management plans may make a good
start on the sometimes long and winding
road towards credit repair, even though
they usually play only a very minor role
in improving your overall credit rating.
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