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Question:
I am thinking of going to a credit counseling program to consolidate my debt.
I have been making my minimum payments on time so far. My credit is still good,
but the bills have gotten out of control and I won’t be able to keep it up much longer.
How will a credit counseling program affect my credit?
Answer:
You’ve worked hard to maintain your credit by making your monthly payments on time.
It’s natural to be concerned about your credit rating. You recognize, however, that
if you keep making minimum payments the way you are now, one financial emergency
will likely sidetrack your minimum payment strategy.
As soon as you are late on a just one payment or go over your credit limit,
you will get whacked with a late payment fee, which may put you over your credit limit.
When that happens, you will get whacked with an over the limit fee.
If that happens, the minimum payment isn’t minimal anymore.
Your new minimum payment will be your minimum payment, plus the late fee
plus the over the limit fee.
Many people, then can’t afford to make the minimum payment any longer.
In addition to that, your credit score is probably not be as strong as you think.
Because of the high level of debt you are carrying, once you’ve used up more than
70% of your available credit, your score starts going down, even if you make your
payments on time.
A question that you should be asking yourself is, “Do you want to still be struggling
to pay off those balances 5 years from now, or do you want to be debt-free?”
As we noted in our post from a couple days ago (See “What’s in Your wallet”),
A $2,500 balance at 21% APR will take you 26 years and 1 month
to pay it off in full. The Interest Paid will be a whopping $5,194.02.
If you want to get debt free, then a Debt Management Program (DMP) also known
as a Debt Consolidation Program, may be an excellent option for you.
- You will benefit from lower interest rates on many of your accounts.
- You will only have one monthly payment to worry about (for creditors that participate).
- You will see your debt start to shrink, not get bigger.
A Debt Consolidation Program offered by a reputable credit counseling agency
is not likely to hurt your credit as much as you may think it will.
The majority of lenders will not report that you are repaying your account through a
Debt Consolidation Program.
If you stick with your counseling program for at least three months, some creditors
will even update your credit report and remove late payments that occurred right before
you went into the program.
As far as credit scores are concerned, the Fair Isaac Company, the creator of the
popular FICO credit scores does not take into account credit counseling notations
on credit reports when calculating credit scores.
You will want to work with a reputable counseling agency though.
Otherwise, if the counseling agency pays your creditors late, your credit history
will be further damaged.
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TAGS:
credit, credit counseling, credit limit, credit rating, Credit Report, credit score, debt consolidation, debt management, debt management program, DMP, Fair Isaac, FICO, late fee, over the limit fee
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