While debt management programs can be lifesavers for some folks, others might find that they do more harm than good. Debt management, also known as credit counselling, is a booming industry in today’s economy.
With so many ads that promise instant relief from debt, these programs are extremely tempting to those who are struggling to consolidate their debt. Will they help you, though?
Let’s take a look at some of the things you should know before you turn to a debt management agency for help. We’ll look at both the benefits and the pitfalls.
Non-Profit Status – Don’t be Fooled
There are many debt management businesses that are organized as non-profit, and they are quite eager to make it seem like they are on your side. However, like all companies, they are still in the industry to make money – they might distribute their earnings in a different way than a for-profit organization would.
Consider organizations that are similar to Accredited Debt Relief, which pairs with a number of major debt relief companies to negotiate with debtors regarding your credit card debt. You’ll make payments each month toward your debt, which can be increased if you want your debt to be paid off sooner.
While you’re doing that, a team will be working to negotiate your debt.
When Your Credit Score Drops
There are plenty of articles and websites on the internet that detail the ways that debt management programs can harm your credit score, but that’s not always true. If you have a number of outstanding payments, or you are way behind on your credit payments, then a debt management program will probably help your credit score.
If you have quite a lot of debt, but are up-to-date with your payments, your credit score could drop if you partner with a debt management company. This is because, when your debt manager negotiates your credit payments, they could change when payments to creditors are made, meaning that late payments will appear on your credit history.
Could You Do it Yourself?
The majority of a debt managers job is to negotiate with your creditors about your repayment plan, with the hopes that your fees and interest rates will be reduced. You can usually do this yourself if you’re struggling to make payment.
Many creditors will be more than happy to help you pay off your debt, since they don’t want you to go bankrupt, since that would be harmful to them. It’s usually not easy to talk to your creditors directly, but it can be done.
You’ll Have to Avoid New Credit
Once you have signed up for a debt management program, you will not be allowed to open new credit lines. If you do, then you run the risk of losing the benefits that your program negotiated for.
Even though it is in your best interest to avoid opening new lines of credit at all costs when trying to consolidate debt, ensure that you won’t need, for example, an auto loan, while you are paying your debts.
Expect a Decrease in Interest Rates
After your debt manager has contacted your creditor(s), you can expect your interest rate to fall by several points, usually to around 12% and 16%. This can be a major benefit if you’re paying more than 17% interest, particularly if you have made late payments to your accounts.
Don’t Expect Immediate Effect
It can take about one or two months after you have partnered with a debt manager for your creditor to receive their payment. If you want to avoid late payments on your credit report, then you will have to make one month, maybe even two, of “double payments”.
One payment will be to the debt manager, and the other will be your regular payment to your creditor. Because many people won’t be able to afford this, then you’ll have to accept that you’ll probably receive a late payment mark on your credit report.
You might also get a collection call from your creditor before they are paid their first disbursement from your debt manager. Unfortunately, it is impossible for a debt manager to stop collection calls, but the majority of creditors will be satisfied when told that you have taken up a debt management program, and will leave you alone after.
Summary
If you think that you could benefit from a debt management program, then be sure to do all your research before signing up for one. These programs could save your life, but they might do more damage if you don’t do your homework!
