Impact of Debt Management on My Credit

“What is the impact of debt management on my credit?” ask many people when they enrol in a Debt Management programme and it’s an understandable concern. Many of us, at some point in our lives, will find ourselves in debt. This can be an extremely stressful time and for a lot of us the big problem relates to the number of creditors we have and the confusion of keeping up with each individual debt. Debt Management programmes allow us to consolidate all these creditors into one, giving us the responsibility of paying back one single monthly payment as opposed to multiple ones.

This is often preferable to managing the debt yourself as Debt Management companies will also help you become more responsible with your finances and negotiate the terms of your debts with your creditors to freeze your interest rates and lower the overall amount you pay back. At the same time there are things that you need to consider if you are about to enrol in one of these programmes. One of the concerns many people have is the potential damage Debt Management can do to their credit.

Credit Ratings and Debt Management

The good news is that enrolling in a Debt Management programme will not, in and of itself, negatively affect your credit rating. The level of credit you can apply for will be the same as before you start consolidating our debts, as long as you don’t default on any payments. There are, however, other factors to consider.

If you are enrolling in Debt Management, the chances are you have already missed payments or accrued penalties on debts you owe. These missed payments will stay on your record after Debt Management. While this may seem obvious, many people misinterpret Debt Management as a kind of eraser of your financial problems. This is not the case. Simply, it is a way to organise the debts you have and pay them off in full without risking bankruptcy – all missed fees will remain on the record.

The other danger to your credit rating is that, if the monthly payment you are being charged is reduced one or more of your creditors is likely to receive a smaller payment than was originally agreed. Even if they have accepted this as part of re-negotiation, it may still be recorded as a missed payment according to the terms of the original debt. If your Debt Management Company has frozen your interest rates, however, the chances of this happening are less likely.

Using Credit in Debt Management

It is highly advisable not to apply for or use any form of credit product once you’ve enrolled in Debt Management. The terms you have worked out with your Debt Management Company at the beginning of your agreement will have taken into account all your possible financial needs and left you enough money each month to cover them. Further credit should, therefore, be unnecessary and will only counteract the good work being done by the Programme. Many financial institutions will, in fact, consider it a form of fraud if you use one of their credit products while in Debt Management as you are borrowing money which it is not guaranteed you can repay.

If you are considering entering into Debt Management but are worrying “what will the impact of debt management on my credit be?” know that your overall credit rating will not be directly lowered by the programme itself. That does not mean there aren’t concerns. If you know what these are, however, it should help you avoid any credit pitfalls.