Resources

Debt

How to Get Out of Credit Card Debt

If you’re like most people, chances are you have credit card debt. In fact, according to Value Penguin, the average debt per American family stands at $6,270. That said, it is very possible to successfully pay off your credit card debt with lots of planning, determination, and time. Everyone’s plan will be different, so keep reading to learn where you should get started.

Options for paying off credit card debt

The first step to paying off your credit card debt is to get organized. Collect all of your financial records, whether online or on paper, and list out everything you owe. This is a great way to assess your current financial situation. Be sure to write out all your monthly bills in addition to your credit card debt, and include the annual percentage rate (APR) – the amount you’re charged to borrow money.

Once you can see each card’s balance and the APR, you can decide how to best move forward. In some circumstances, you might want to start with paying off the lowest-balance cards first. Or, it could be smartest to tackle the debt with the highest interest rate first. 

The next step is to compare your debt with your other expenses and income. This includes things like rent or mortgage debt, grocery bills, and utilities. Then take into account how much money you’re making, the interest earned on your savings, and any other sources of income.

1. Decide on a debt payment strategy

There are a few different paths you can take to tackling your credit card debt. Deciding on a concrete plan and sticking with it will help you reach your financial goals, and hopefully create healthy spending habits for the future.

  • Debt Snowball. The Debt Snowball Method helps you pay off your debt by starting with your smallest debt balance first and then addressing the larger ones. Once you’ve paid off your first smallest loan, begin to roll those payments into the next, and so on. Similar to a snowball rolling down a hill, you’ll gradually make bigger payments and ultimately eliminate all your debt! 
  • Debt Avalanche. The Debt Avalanche Method works similar to the snowball approach, but instead of paying off the loan with the lowest balance, you put money into the one with the highest interest rate. It could potentially save you a lot of time and money compared to snowballing, especially if you have larger amounts of debt to pay off.
  • Pay More than the Minimum. Card card companies charge a low monthly minimum payment (about 2-3% of your balance) to make sure you’re paying them in a timely manner. But to make sure you aren’t giving more money to the bank, pay as much of your balance as you can every month. The longer it takes you to pay, the more money in the credit card company pocket. 
  • Automate. It’s easy to forget to make a monthly payment here and there, so set up an automatic credit card payment so it comes directly out of your bank account. This is a great way to avoid late fees and higher interest rates, and a potential hit to your credit score.

2. Consider credit card refinancing vs debt consolidation

Credit card refinancing and debt consolidation are both ways of helping you pay off multiple debts with a personal loan. Keep reading to learn more about which method would work best for you.

What is credit card refinancing?

If you struggle to pay more than the minimum monthly payment on high-interest credit cards, this could be a good option for you. Credit card refinancing is a type of debt consolidation that allows you to combine multiple credit card balances into one payment. They often come with low, fixed interest rates that don’t change during the duration of the loan.

One way to do this is by using a balance transfer credit card. That way you can pay off your current credit card(s) with a brand-new balance transfer card that has a low or zero-rate interest. Keep in mind that not all low- or no-interest promotional periods last forever, so the credit card company could potentially charge a balance transfer fee in the future. 

What is credit card debt consolidation?

Debt consolidation takes all of your debts and rolls them into one single payment. This option should ideally offer a better payoff deal than your old debts’ original terms, such as lower monthly payments and interest rates. These are provided by a bank or private lender in two different forms: secured and unsecured. A secured loan is backed by one of your assets, like a car or house. An unsecured loan is not backed by collateral and is more difficult to obtain. These may have higher interest rates and lower qualifying amounts, but the interest rate is still usually lower than what is charged by credit card companies. It’s a great way to pay off overwhelming amounts of debt.

3. Work with your creditors and lenders

Healthy communication goes a long way. If you’re in trouble or having difficulty paying off your debt, be sure to speak with your creditors to explain the situation. A credit card issuer may be open to negotiating new payment terms or offer a hardship program, especially if you’ve been a longtime customer. A hardship program provides special relief for those who have circumstances out of their control, such as unemployment or illness, that affect their ability to manage payments. Accepting this help or renegotiating with your issuer could lead to waived fees or a more affordable interest rate, thus helping you get a handle on your debt. And besides, the worst they can say is “no.”

4. Get help from a professional

Financial Coaching

When planning for your financial future and how you’re going to get out of debt, there are certain questions best answered by a professional. Turn to an expert who can provide free advice, support, and guidance for your trickiest of questions. Our financial coaches are a helpful resource for achieving all of your money goals.

Debt Management Plans (DMPs)

This is a viable option for anyone struggling to pay their bills every month. DMPs work by combining all of your unsecured debts into one monthly payment that you can pay off in three to five years. You pay a credit counseling agency and the interest rates, monthly payments, and late fees are lower than average.

Our coaches can answer any questions about Debt Management Plan services if you are considering a DMP.

Debt Settlement

With debt settlement, a creditor agrees to accept less than the amount you owe on the loan. Which sounds great, BUT it’s not an option for everyone. You’ll have to work with a debt settlement company to negotiate with your creditors on your behalf and there are some risks involved. You can always talk to a Credit & Debt coach about Debt Settlement services.

Filing for Bankruptcy

There are a few different types of bankruptcy for when you have no other options for eliminating your debt. Filing for Chapter 7 bankruptcy completely wipes out all your unsecured debts (like credit cards), but there are consequences. Chapter 13 bankruptcy is another option and can help you restructure your debts into a payment plan, which could be good if you have assets you wish to retain.

Monitor your spending habits

Creating a budget for yourself is a great way to stay organized and on top of your finances. Especially when you’re feeling overwhelmed by all your expenses (and perhaps a dwindling bank account). Money Sensei™ makes budgeting easy for everyone, plus they might even save you money! It’s a budgeting app and money tool that gives you free insight into your spending. Get started and see for yourself just how simple it can be to get your finances in tip-top shape.

Resources

Debt

The Debt Avalanche Method: Try this Debt Relief Strategy

The debt avalanche method helps you pay down your debt by starting with the highest interest rate loans first. 

This strategy has the potential to save you money while becoming completely debt-free! Keep reading to learn how it all works, plus the pros and cons.

What is the debt avalanche method?

With the debt avalanche method, you target your debts with the highest interest rates first. Be sure to make the minimum payment on all of your loans, but take any extra money you have and put it towards the loan with the highest interest rate. 

Do this until that loan account is completely paid-off, and then switch your focus to the loan with the next highest interest rate. You’ll be able to work your way through all your loans until eventually, you owe nothing left!

How does the debt avalanche strategy work?

The debt avalanche strategy works much like any other to-do list you need to conquer–start by getting organized! Here’s a step-by-step guide to how you can pay-off your debt with this method, and hopefully save on interest along the way.

  • Make a list. Take stock of all the debts you owe and order them from highest interest rate to the lowest. This can apply for all types of personal loans and credit card balances.
  • Pay the minimum. Be sure to continue making the minimum payments on all of your credit card balances and loans. Even though you’ll be putting the majority of your extra cash into the loan with the highest interest rate, it’s important to be mindful of all your debts. You don’t want to owe more in fees or potentially damage your credit score.
  • Pay more on the highest rate loan. The more additional money you put towards your highest interest rate loan, the less you’ll owe over time at that high rate cost.
  • Keep up the momentum. Once you’ve paid off the loan with the highest rate, first of all, congrats! Then, cross it off your list and keep yourself motivated by redirecting the amount you were putting towards that loan to the one with the next highest interest rate. Soon, you won’t have any more loans to cross off your list!

Using the avalanche method to pay off debt

Many people turn to the debt avalanche method as an effective way of paying off their debts. This is because on most loans, a percentage of each monthly payment goes toward an interest charge, and the rest reduces your overall balance. With higher rates, you need to pay more money to cover the high-interest costs, which means your payment might not tackle your loan balance as much as you’d like. By lowering your overall interest rate, you’ll waste less money on interest and contribute more to your overall debt.

Pros and Cons of the Debt Avalanche Method

The debt avalanche method could save you a lot of time and money, especially if you have larger amounts of debt to pay off.  And all it takes is switching around the order in which you pay them off! However, this strategy doesn’t work for everyone. Here are a few pros and cons to factor in when deciding for yourself.

  • Pros: The biggest advantage is you’ll minimize your total cost of borrowing (as long as you stick to your plan). It also decreases the amount of time it will take you to get out of debt (again, assuming you stick to the plan), because less interest will accumulate. If you’re someone who’s disciplined enough to pay extra every month on larger debts, then this strategy can definitely work for you. 
  • Cons: Did you catch the key word we just mentioned? Discipline. This debt strategy requires a lot of discipline to see the entire plan through. And it gets tough to continually put all your extra money towards paying off your loans instead of daily expenses, emergencies, or indulgent purchases. It won’t be an effective means to becoming debt-free if you miss a monthly payment or simply lose motivation.

What to do if you need more help

Becoming completely debt-free is a long process! And it’s more than OK to ask for a little extra help along the way. Here’s what to do if the debt avalanche method doesn’t seem like enough, or not the right option for you.

  • Consider the Debt Snowball Method. With this option, you’ll pay off your debts in order from smallest to largest. The theory is that by having smaller wins early on, you’ll want to stick with the plan to completely eliminate even your largest of debts. The downside is, this strategy could end up being more expensive.
  • Talk to a Credit Counselor. These are people who work for nonprofit organizations and can provide educational resources and assistance with your debt. Oftentimes, they’ll help you create a debt management plan to lower your monthly loan payments and interest rates, getting you out of debt quicker.
  • Look into Debt Settlement. You’ll connect with a debt relief company that will help you negotiate or consolidate the balance owed on your loan for a fee.  Then, you’ll work out a new payment plan to pay off one large payment instead of the debt amount.

Resources

Debt

The Debt Snowball Method: How to Pay Off Your Debt

The debt snowball method helps you pay off your debt by starting with your smallest debt balance first and then tackling the larger ones. Doing so helps you create momentum to become completely debt-free! Keep reading to learn how and why this strategy works, plus the pros and cons.

What is the debt snowball method?

Using the debt snowball method, you’ll be able to start paying off your smallest debts first before handling the bigger amounts. It’s a great way to reward yourself with wins throughout the payback process, and hopefully keep you motivated to pay off more and more. Much like a snowball rolling down a hill! Plus, this method allows you to start with the smallest amounts no matter how much the interest rate is.

How does a debt snowball work?

The debt snowball method works very similar to how people tend to manage a lot of things on their to-do list–start with the easiest task first! You’ll make a list of all the debts you owe and their amounts in order from smallest to largest. Then, you’ll pick the smallest (a.k.a. “easiest”) on your list and begin making payments with as much extra money as you can afford. With your other debts, you’ll simply pay the minimum required. As the first debt is settled, then you move on the next smallest debt and repeat the process!

How to snowball debt

Starting to snowball your debt is a relatively simple process and requires only a few steps. And luckily, it’s applicable for most kinds of consumer debt: student, personal, and auto loans, credit card balances, and medical bills. They don’t, however, work for mortgage repayments, so keep that in mind before getting the ball rolling.

  1. Get organized. Paying off debt can feel very overwhelming, so do yourself a favor and write out all of your debts. List them from the smallest balance at the top to the largest at the bottom. Don’t worry about the interest rates, monthly payment amounts, or any other loan requirements. Just focus solely on the balance amount.
  2. Pay the loan minimums. This is important, because if you don’t pay at least the minimum required on all your loans, you might be stuck paying extra fees and penalties. (And that may damage your credit score, which you definitely don’t want to do!)
  3. Pay more on your smallest balance. Every month, put any extra money you have towards the debt at the top of your list. Remember, your goal is to focus on paying off this small balance first so you can tackle the others later.
  4. Keep the momentum going. Once your smallest balance is paid off (congrats!), cross it off your list and switch your focus to the next smallest. Everything you were paying towards the first loan should now go to the next one, including the minimum payment you were already making. As you pay off each debt one at a time, your total payment will become bigger until all your debts are paid!

Pros and Cons of the Debt Snowball Method

The debt snowball method can be a great way of eliminating your debt, especially if you’re motivated by small victories and positive reinforcement. Or, if you don’t have a lot of high interest debt. It isn’t the right method for everyone, though, so here are a few pros and cons to keep in mind to make the best decision for you.

  • Pros: The biggest advantage is the psychological benefits. It feels great to see your debts disappearing one by one, and that can increase your desire to keep paying off debt. Plus, it gets rid of extra stress by allowing yourself to focus on one debt at a time and not worry about comparing interest rates or APRs. 
  • Cons: The biggest disadvantage is that it can sometimes be more expensive overall to utilize the snowball method. This is because while you’re focusing on balances instead of loan requirements, you could end up paying more money in interests and fees. 

Pro-tip: If you’re worried about spending more money on interest, include your credit card APRs and loan rates when first getting organized and listing your debts. This will help you foresee if this strategy will be too expensive in the long run. If so, consider the Debt Avalanche Method, which prioritizes paying off your highest-interest balances first.

What To Do If You Need More Help

Sometimes we all need a little extra help, no matter how much debt you have. Here’s what to do when a debt snowball plan doesn’t seem like enough.

  • Consider Debt Settlement. This option connects you with a debt relief company that will help you manage any outstanding debts by negotiating or consolidating the balances. In exchange for a fee, you’ll work out a payment plan to pay off one large payment instead of the debt amount.
  • Opt for Credit Counseling. These are nonprofit organizations that provide educational resources and assistance with debt. They’ll help you create a debt management plan to hopefully lower your monthly payments and interest rates so you can pay off your loans as soon as possible.

Resources

Debt

Bankruptcy: Everything You Need to Know

Bankruptcy is a scary word. But it could offer the financial solace you need when a financial situation has become too overwhelming to bear. Keep reading to learn exactly what it is and how it may not be as terrifying as you think.

What is bankruptcy and how does it work?

Bankruptcy is the legal process that happens when someone or a business cannot repay their outstanding debts.

It’s overseen by federal bankruptcy courts and is there to help people and businesses eliminate their debt partially or completely, or sometimes help them pay part of what they owe. This is a very complex task to undergo and shouldn’t be done without legal help!

First, you’ll need to meet the requirements to file for bankruptcy, such as showing you can’t repay your debts and also that you’ve completed financial counseling with a government-approved credit counselor. The process starts when the debtor files a petition and their debts are measured and evaluated. Then, depending on which type of bankruptcy you are filing for, the rest of the process will have its own specifications. The goal is to give you a financial fresh start, but it will stay on your credit report for many years and could make borrowing money in the future very difficult.

Types of bankruptcy

There are several different types of bankruptcy all known as chapters. They all vary in filing costs, complexities, and more.

  • Chapter 7 Bankruptcy, or Liquidation, is the most common form of bankruptcy chapter. This process does not include a repayment plan, instead, the debtor’s nonexempt assets are collected and sold to pay back the creditors. Nonexempt assets include family heirlooms, second homes, cash, and stocks or bonds. This option is applicable for people who don’t have regular income or who don’t want to use Chapter 13’s plan, which we’ll get to next.
  • Chapter 13 Bankruptcy, or a Wage Earner’s Plan, allows individuals with regular income to create a plan to repay all of their debts. This is the second most common chapter and typically takes debtor’s three to five years. 
  • Chapter 11 Bankruptcy, or Reorganization Bankruptcy, is for businesses who wish to remain open during the bankruptcy process and become profitable once again. This chapter creates new ways to increase revenue and cut costs while under court supervision. For example, a business would raise their service rates or offer more services to become profitable.
  • Chapter 9 Bankruptcy is for municipalities and political subdivisions, such as hospitals, airports, and school districts, who are in financial distress. These institutions do not have to liquidate their assets or close, but must create a plan for repaying them over a period of time.
  • Chapter 12 Bankruptcy is available to provide relief for family farmers and fisherman. It enables them to carry out their business while coming up with a debt repayment plan.
  • Chapter 15 Bankruptcy is for when the filings involve people from multiple countries. It is typically filed in the debtor’s home country.

Who Qualifies for Bankruptcy? 

Whether or not you meet the requirements to file for bankruptcy is a good way to determine if it’s a good option. The most common types of bankruptcy for an individual are Chapter 7 and Chapter 13. 

Chapter 7

To qualify for Chapter 7 bankruptcy you must: 

  • Have a monthly income that’s lower than the median income for the same sized household in your state 
  • (if the above is false) Pass a means test to decide if you have enough money to make payments to your creditors
  • Not have filed for Chapter 7 bankruptcy in the past eight years
  • Not have filed for Chapter 13 bankruptcy in the past six years
  • Complete a credit counseling course.
Chapter 13 

To qualify for Chapter 13 bankruptcy you must: 

  • Have a sufficient income to make debt payments
  • Your unsecured debt must be <$419,275
  • Your secured debt must be <$1,257,850
  • Have filed federal and state income tax returns for the past 4 years
  • Complete a credit counseling course.

When is bankruptcy a good option?

Oftentimes the word “bankruptcy” rings huge alarm bells in our brains. But, if you’re unable to repay your debts and provide necessities like food and shelter for you and your family, it may be your best option. And it isn’t the end of the world. Filing for bankruptcy means an end to collection calls, wage garnishments, potential lawsuits, and the best thing–debt!

The downside of filing for bankruptcy

Declaring bankruptcy is a scary move for many people. Yes, it can help you relieve your debts, but it has a very bad reputation–and possibly for good reason. The biggest being the fact that it lowers your credit score, making it more difficult to get a credit card, loan, mortgage, rent an apartment, or buy a business in the future. (Take a deep breath here, that was a long list!) And a Chapter 7 bankruptcy will stay public record for 10 years after you file. On the other hand, most debtor’s already have poor credit scores from late and missed payments.

Alternatives to bankruptcy

Bankruptcy is just one possible solution when it comes to unmanageable debt. These are some alternatives to consider. Keep in mind, most will still affect your credit score, but maybe not as much as bankruptcy. 

  • Ask for help. The government offers approved credit counseling or debt management plans that can work with your creditors so you can pay back what you owe.
  • Opt for a debt consolidation loan. This is the process of taking out a new loan to pay off your current debts. They typically offer better terms such as lower interest rates and monthly payment options. 
  • Talk to your creditors. They don’t want you to not repay your debts either, so communicate with them to see if they’re willing to renegotiate a repayment plan you can actually manage.

How to file bankruptcy

All bankruptcy cases go through the federal court system as outlined in the U.S. Bankruptcy Code. You can file for bankruptcy on your own, however, it’s best to work with a bankruptcy lawyer. There will be filing costs and legal fees, but free services are available for those who qualify. The process includes:

  • Compiling your financial records. This includes listing all debts, assets, income, and expenses to give the courts and whoever’s helping you a good sense of your situation.
  • Getting credit counseling within 180 days before filing. You actually can’t file for bankruptcy until you’ve gone through this requirement. It shows the courts that you’ve done everything you could before filing bankruptcy as a last resort.
  • Filing the petition. And if you haven’t found a lawyer, this is the time to do it if you want one. Without legal advice, you run the serious risk of not knowing all of the federal and state laws which could affect the outcome of your case. 
  • Meeting with your creditors. Once your petition is accepted, the case will be assigned to a bankruptcy trustee who will set up a meeting with your creditors. This will give them the chance to ask questions about your case.

FAQs

How long does it take to file bankruptcy?

The amount of time it takes to file bankruptcy and complete the process varies by chapter. It will also depend on your financial situation and the amount of debt you have. Generally, a Chapter 7 Bankruptcy can take three to seven months, and Chapter 13 Bankruptcy is anywhere from three to five years.

Can you file bankruptcy on medical bills?

Yes! But you can’t limit your bankruptcy case strictly to your medical bills. When you file, be sure to list all of your debts, and that includes medical bills. They are considered non-priority unsecured debt, meaning it can be forgiven.

How long after bankruptcy can I buy a house?

The length of time it takes to buy a house after bankruptcy depends on the type of bankruptcy you filed for and the type of mortgage loan you’re applying for.

This is because bankruptcy can severely affect your ability to obtain unsecured credit, and even if you do get it, lenders may charge you higher fees and interest rates. Another option may be to reaffirm your current mortgage during the bankruptcy proceedings so you can keep your home and continue paying that mortgage.

Do you need a lawyer to file bankruptcy?

You don’t have to have a lawyer to file for bankruptcy, but the only person that comes to mind who represented themselves in a court of law without one is Ted Bundy. (Yikes.) Bankruptcy has long-term financial and legal consequences, so it’s very important you have a qualified lawyer to guide you along the way.

Resources

Debt

Debt Consolidation: Everything You Need to Know

When you’re in over your head with student loan payments, credit cards, and more, paying off debt can seem nearly impossible.

Debt consolidation might be an option for you if you need help digging yourself out of a hole. Keep reading to learn more.

What is debt consolidation?

Debt consolidation is the process of taking out a new loan to pay off other debts you owe. This option ideally offers a better payoff deal than your old debts original terms, such as lower interest rates and monthly payments. 

It’s a great way to pay back overwhelming credit card debt, student loans, and other liabilities.

How does debt consolidation work?

The first step to starting debt consolidation is to visit your bank, credit union, credit card company, or online personal loan provider to apply for a consolidation loan. If you have a good history with the institution you’re applying at, it should be easier to get the loan. If you aren’t approved, you could try private lenders or mortgage companies. 

Once you have the loan, it will enable you to pay off all your debts through that single loan. Many creditors are willing to do this because it increases their chances of actually collecting the debts. 

Your new loan will be refinanced with an extended repayment period, so keep in mind you will likely be in debt for a longer period of time. Plus, a lower interest isn’t’ always guaranteed, so be sure to read the fine print with your financial institution. 

To sum up the debt consolidation process: 

Step 1: Apply for a loan with a trusted lender 

Step 2: Take out the loan with the lowest rates and best terms

Step 3: Use your loan to pay off your existing debts. 

Different types of debt consolidation explained: how to consolidate debt

There are different kinds of debt consolidation loans and each have their own set of pros and cons. Learn which could be right for you.

1. Debt Management Plans

Debt management plans are a solution for anyone struggling to pay their bills every month. They work by combining all of your unsecured debts into one monthly payment that you can pay off in three to five years. The interest rates, monthly payments, and late fees are lower and you pay a credit counseling agency, who will then pay the creditors the agreed-upon amount.

Learn more about Debt Management Plans>

2. Debt Settlement

Debt settlement is very different from debt consolidation. Like we said, consolidation is a loan that lumps all your unsecured debts into one single payment. Settlement, however, is when you work with a company to negotiate a lump-sum settlement payment with your creditors for less than the original amount you owe. These companies charge a fee for their service, and oftentimes it’s between 15-20% of your total debt. They do not make any actual payments to your credit institutions, they only try to negotiate your current debts.

Learn more about Debt Settlement >

3. Debt Consolidation Loans

If you’re having trouble managing all of your outstanding debts, a debt consolidation loan may be an option. Banks and private lenders offer these in two different forms: secured and unsecured. A secured loan is backed by one of your assets, like a car or house, to act as collateral. An unsecured loan is not backed by any assets and is more difficult to obtain. They also have higher interest rates and lower qualifying amounts, although the interest rate is still typically lower than what is charged by credit card companies and financial institutions.

Personal loans

Personal loans can be used for just about anything, including paying off your debt! The lender may ask you what you’re planning to do with the money, but most will just want to know you’ll be able to pay it back. 

They aren’t secured by collateral and can be relatively inexpensive compared to other loans.

Learn more about personal loans >

Other types of loans

We recommend exploring the options above before tapping into retirement funds and your home value. That said, it’s important to understand all of the options below. 

401(k) loans

A 401(k) loan is when you borrow money from your retirement savings account. Every employer’s plan is different, but it’s typically a fast and convenient way to get the money you need. You’ll have to pay back the borrowed money with interest within five years of taking the loan, depending on your employers terms. 

Home equity lines of credit (HELOCs)

A home equity line of credit (HELOC) is a second mortgage that allows you to access cash based on your home’s value. Similar to a credit card, they’re pretty flexible in that you can borrow as much as you need up to your home’s equity. These also have flexible interest rates. 

To get one, you need a credit score of 620 or higher, a home value that’s at least 15% more than what you owe, and a debt-to-income ratio that’s 40% or less.

Home equity loans

A home equity loan is when you borrow money using your home as the collateral. The money comes as a lump-sum payment and you repay the loan with a fixed-rate interest during a predetermined amount of time. 

The amount of money you can borrow is usually determined by your income, market value of your home, and your credit history. A bank, credit union, mortgage company, and mortgage broker are all options to consider taking a loan from.

4. Balance Transfer Credit Cards

If you don’t want to take out a loan, you might consider consolidating all of your credit card payments onto a new credit card. This could be a good idea if the new card charges little to no interest or if there is a $0 annual fee and $0 transfer fee.

When is debt consolidation a good option?

When considering whether debt consolidation is a good idea for you or not, think about your current situation. If you’re juggling multiple bills with different payment amounts, interest rates, and due dates, consolidating everything into one lump-sum payment might be a good idea. Especially if you can get a lower interest rate than what you already have.

“What type of debt consolidation option is best for me?”

The two most common (and least risky) ways of consolidating debt both involve lumping all your current debt payments into one monthly bill. 

The first is to move all your debts to a 0% interest balance-transfer credit card and be sure to pay it in full each month. You’ll most likely need a credit score of 690 or higher to qualify. 

The next option is to apply for a fixed-rate debt consolidation loan at your financial bureau. Then, use that money to pay off your debt while paying off that loan in set installments. These loans don’t require an excellent credit score, but the higher the score, the lower your interest rate will probably be.

Risky debt consolidation options you should avoid:

Debt consolidation isn’t a perfect solution for overwhelmed debt and doesn’t always work. Here are two loans to be wary of because they put two very important things at risk–your home and your retirement.

401(k) loans

A 401(k) loan allows you to borrow money against your retirement savings account, so it should be used as a last resort when you need to pay off debt. 

This option is appealing because of it’s low-interest, but it could totally derail your retirement savings. The amount of money you borrow won’t be growing compound interest that could benefit you in the future. There could also be potential tax consequences and penalties for this type of loan if it’s not paid back. Plus, you’ll still have to pay back the balance of the loan if you leave the job.

Home equity lines of credit (HELOCs) & home equity loans

Using home equity lines of credit (HELOCs) or home equity loans relies on your home as collateral, so it can be a risky option to consider. 

Let’s start with HELOCs — like we said, these are structured similar to credit cards in that you can access cash based on your home’s value. They have a low, variable rate but because you can take out different amounts at different times, they’re harder to budget for. 

Adjustable rates also mean that your payments could increase, leading to deeper debt in the long run.

A home equity loan can be a good idea depending on your financial situation, but nonetheless, you should proceed with extreme caution. With this loan you’ll have a fixed rate and a set payment schedule, so it’s easier to budget for. 

But, if you miss a payment or are late, it could put you in danger of losing your home. And if you decide to sell while the loan is still in place, you’ll have to pay the entire balance at once.

FAQs

Does debt consolidation hurt my credit?

If you make your loan payments on time every month and pay more than is due, it could help improve your credit score. 

But if you continue unhealthy spending habits like spending more than your line of credit, or you’re late with your payments or completely miss them, this will hurt your score.

Can I consolidate my debt before applying for a mortgage?

Yes, but patience is key. Consolidate your debt well in advance of buying a home so you’ll be more likely to be approved for a mortgage. 

If you pay off your consolidation loan on time and in the full amount, your credit score will increase, which looks great to mortgage companies. It shows you will be a responsible borrower.

Can I refinance my mortgage to consolidate debt?

You can refinance a mortgage to pay off debt, but you’ll want to make sure you have enough equity. A good rule of thumb is if you’ll end up owing more than 80% of your home’s value after you refinance, hold off because you’ll have to buy mortgage insurance. You need 20% equity in your home to avoid mortgage insurance.

Can I file bankruptcy on debt consolidation?

They are two different things! Bankruptcy is a legal process overseen by the federal courts and designed to protect individuals and businesses overwhelmed by debt. It does major damage to your credit score, so another viable option is debt consolidation. 

You’ll only want to file for bankruptcy if you cannot consolidate your debt. Speak with a debt coach or a lawyer before going down this path.

Resources

Debt

Watch Out! Debt Collectors Can Take Your 3rd Stimulus Check. What Can You Do?

The third round of stimulus checks for COVID-19 relief started going out this past weekend after the bill was signed on March 11th

But will you see that precious #StimmyCheck? If you have debt in collections, your check might disappear before you even realize it ever hit your account. Keep reading to learn the latest updates.

How can debt collectors take stimulus check payments?

Debt collectors may be able to take your stimulus check depending on the type of debt you have.

While the last stimulus check was protected from garnishment by debt collectors, the 2021 Economic Impact Payment (3rd stimulus check) doesn’t have the same protections.

Unfortunately, this lack of protection could severely impact those who need it most. There are ongoing efforts to close this loophole — letters to Congress members and offices — but for now, those who may be impacted should prepare.

Is your #stimmy at risk? Here’s what to do.

Your stimulus money isn’t at risk of being taken to pay back taxes, child support, or government debts. But private debt collectors are not explicitly exempt from going after your stimmy as soon as it hits your bank account — so what can you do?

1. Pay your bills early

Start checking for your stimulus payment to hit your bank account over the next few weeks. Track your payment on the Get My Payment tool. Chances are, debt collectors will act fast — you’ll have to be diligent if you need to prioritize your spending to pay for rent, food, or other bills just in case.

However, if you are able to pay your debts, you should do that — otherwise, you are only hurting your credit score and racking up interest payments, which will cost you more money in the long run.

Break up with your debt just like Noah did.

2. Settle your debts as soon as you can!

Large amounts of debt, like loan debt or credit card debt, can be a huge distraction in these trying times. If you’re able to, we’d recommend you make a substantial payment towards your debt with this stimulus check.

While there’s a lot to consider, your #StimmyCheck can be a catalyst to help you get back on your feet!

Relieving yourself from the debt of stress is rewarding, and you don’t need to be a financial expert to get back on your feet. Reach out to a C&D financial coach, or look into debt relief solutions or credit building tactics.

3. Close your bank account

If your check hasn’t hit your account yet but it’s scheduled for direct deposit, you could close your bank account. This would cause the IRS to send your check via snail mail, which prevents it from being garnished. If you take this route, then you’re likely looking at a delay in your payment arrival so, that’s something to consider as well. 

Understanding the 2021 Economic Impact Payments

Stimulus checks will pay out $1,400 to individual taxpayers that earn under $75,000 annually, and $2,800 for joint filers making up to $150,000 annually — plus an additional $1,400 for every dependent, contingent on the following:

  • 2019 Taxes (if you have filed for 2020 already, they’ll use that one)
  • 2020 Taxes (if you haven’t filed this year’s return yet, they’ll look at 2019 taxes, and make up for the difference in this year’s tax return)
  • Number of dependants
  • Amount you received in 1st and 2nd stimulus payments (read more about the Recovery Rebate Credit)
  • Your income level (phased out)
    • If you make more than $75,000 individually, but less than $80,000 individually, or more than $150,000 jointly, but less than $160,000 jointly, you may still be eligible for a “phased out” stimulus check.

For the latest updates on the third stimulus check and the 2021 Economic Impact Payments, visit the Get My Payment page on IRS.gov.

Resources

Debt

Debt Management Plans: Everything You Need to Know

A Debt Management Plan (DMP) can help manage your payments and even reduce your accruing debt, and is one of many debt relief solutions available. If you’re having trouble paying your bills every month, a DMP might be exactly what you need. Keep reading to learn more about how it works.

What is a Debt Management Plan?

Debt Management Plans are defined as “an agreement between a debtor and a creditor that addresses the terms of an outstanding debt.”¹

It’s a debt solution that combines your unsecured debt payments into one monthly payment and allows you to pay off debt in three to five years by reducing interest rates, monthly payments, and late fees.

If you’re struggling to pay off credit card debt or unsecured loans, a DMP can be a magical alternative to bankruptcy. You will make one monthly payment directly to your credit counseling agency, who then will pay the creditors an agreed-upon amount.

How do Debt Management Plans work?

Debt management plans work by discussing your current financial situation with a credit counseling agency who will then create a plan to pay off the amount you owe to creditors. The process starts by having a consultation with a financial coach who will review your current finances and help you understand your options. 

Your coach can then negotiate with your creditors on your behalf to create new payment plans, such as reducing minimum payments, lowering interest rates, and stopping late fees. Then, rather than pay your creditors separately each month, you pay a one-time monthly payment to the credit counseling agency. The goal is to do so in a way you can afford and ultimately become debt-free while the creditors get paid. It’s a win-win. 

Learn more about C&D’s Debt Management Plan services >

Can creditors refuse a DMP?

A creditor does have the right to refuse any Debt Management Plan sent to them. Each company has its own set of rules for what they will and will not accept. That said, even if your account hasn’t always been in great standing, there’s still a change your creditors will work with you.

How long is a Debt Management Plan?

The timeline for full repayment is often three to five years. The timeline depends on how much debt you have and how much you can afford to pay each month. 

Do DMPs really work?

Debt management plans can help someone struggling to pay back overwhelming amounts of unsecured debt. But, these plans are not for everyone. 

Depending on your situation, bankruptcy or another form of debt relief may provide even more benefit. We recommend consulting with a professional to understand all of your financial options.

What are the benefits of a Debt Management Plan?

Here are some of the benefits you may find from a DMP:

  • Reduced stress.

Having debt without a plan to pay it off can feel like a never-ending cycle. With professional advice, you’ll be able to create financial goals, review your budget, and figure out the options to best serve you in the future. 

  • Waived fees and lower payments.

A financial coach can negotiate with your creditor to waive fees and lower your monthly payments, which will help pay off your debt faster and create space in your budget for other necessary expenses.

  • You’ll pay off debt faster.

If your coach can negotiate a lower interest rate, a larger percentage of your payment will go to your debt balance, meaning less debt more quickly.

  • It’s a one-time monthly payment.

Managing one bill is much easier than trying to stay on top of multiple bills from several different creditors. 

  • You have someone on your side.

Your coach is there to help you, not pressure you into a more difficult financial situation. Unlike some debt relief solutions, it’s comforting to know someone is there to have your back and keep you on track to success.

Disadvantages of a Debt Management Plan

Here are some other factors to consider when deciding if it’s the right decision for you.

  • DMPs only resolve unsecured debt. 

Mortgages, car loans, student loans, and most medical bills are often not covered with Debt Management Plans.

  • You can’t have open credit cards. 

Plus, applying for a new credit card during this period may lead creditors to cancel the agreement made with your financial agency.

  • A missed payment can end it.

Sticking to the plan you and your coach made is essential to ensure your Debt Management Plan isn’t cancelled by missing a payment here and there.

FAQs

Are Debt Management Plans legally binding?

Debt Management Plans are an agreement between you and your credit counseling agency. If you’ve enrolled in a DMP and are struggling to stay on track, contact your coach and explain your circumstances as soon as possible.

Does a Debt Management Plan affect your mortgage?

A Debt Management Plan doesn’t include secured debts (a.k.a debts secured against property that you own like cars or other property), so it won’t affect your mortgage payments. Before committing to a DMP, you will work with your financial coach to make sure the amount you pay towards your mortgage will be factored into your budget. This way, you’ll reach an affordable figure to pay back to creditors instead of continuing to struggle to pay all your bills.

Can you get a mortgage after a Debt Management Plan?

You’ll be able to get a mortgage more easily than you would have if you’d applied prior to completing your Debt Management Plan. This is because you won’t have any unsecured debt to worry about and you’ll have your full income available to use for a mortgage plus other expenses.

How will a Debt Management Plan affect my credit rating?

Short answer: a Debt Management Plan won’t directly impact your credit score. 

In fact, ensuring that your accounts are paid on time will likely give your credit score a boost. These plans do require you to make monthly payments, so if you don’t stick with it, there can be significant negative impacts on your credit history and score. If your Debt Management Plan includes your creditors re-aging your past due accounts and setting them as current, your monthly DMP payment will ensure payments on all accounts included in your DMP. This will help you build a positive payment history, thus making your credit score higher. Also, you’ll be repaying your accounts in full, which is better than settling your debts for less than the full amount owed. 

One important factor to consider is closing your account(s). This could increase your credit utilization ratio, or the percentage of your total available credit on all the accounts (like credit cards) you’re currently using. You want a lower utilization ratio to keep your credit score high, so closing credit cards can decrease your available credit. The impact this has varies person-to-person and depends on your exact situation, so be sure to talk with your coach about this first.

How much do Debt Management Plans cost?

You can stop holding your breath! Debt management plans are always either free or low cost. There may sometimes be an enrollment fee of $50, and sometimes there’s a monthly administrative fee, which maxes out at $75. It all depends on what state you live in, so be sure to ask up-front. Most times, your interest savings can cover these costs.

Resources

Debt

Debt Settlement: Everything You Need to Know

Debt Settlement is one of many debt relief solutions at your disposal for getting out of debt and rebuilding your credit. Ready to learn more? Read on to learn how it works.

What is debt settlement?

Debt settlement is defined as “an agreement between a lender and a borrower for a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt.”¹

To put it simply, you make a deal with your creditor or lender to accept one large payment instead of your full debt amount.

How does debt settlement work?

Debt settlement works by negotiating your current debt with your creditors (lenders) and debt collectors. The goal is to lower the amount you owe into something you can afford to pay so that you become debt-free and the creditor gets paid.

When you use debt settlement negotiation services from a reputable company, they negotiate on your behalf. Alternatively, you could negotiate directly with your creditors and attempt to settle your debt on your own. Read on to understand how negotiation works.

You may find it helpful to speak to a financial coach to explore your options and determine if you’re a good candidate for debt settlement.

Learn more about C&D’s Debt Settlement services >

How to negotiate debt settlement

Before you can negotiate your debt, your accounts usually need to be delinquent by at least 90 days. It’s common for creditors to sell your debt to a debt collector at around 180 days, so your window to negotiate is often within 90 to 180 days of delinquency.

Additionally, you’ll need some money saved to settle your debt. Some creditors accept payment plans, but usually, you’ll pay a lump-sum that’s less than the amount you owe. 

Using debt settlement negotiation services

Negotiating on your own can require a considerable amount of effort and time, which is why many people seek out professional services.

There are many benefits to using a debt settlement company to negotiate your debt vs. doing it yourself. If you’re new to debt settlement then you may find it easier to have a professional negotiate on your behalf. Additionally, debt settlement companies can customize debt relief plans based on your goals, your total debt, and your budget. Guidance from a professional service provider will ultimately help you stay on track to eliminate your debt and reach your financial goals.

When choosing a debt settlement company, it’s important to ensure that they are compliant with the Federal Trade Commission regulations for the industry. Consider the amount of time they’ve been in business, ask questions about negotiation fees and associated costs, and look for honest reviews about the business. Our coaches have experience with some of the most trusted debt settlement companies so, if you have questions, you can reach out and ask us, anytime!  

How to negotiate a debt settlement on your own
If you choose to do a DIY debt settlement, there are some things you should know:
  1. You’ll need to negotiate how much you can pay.
  2. You’ll need to negotiate how it’ll be reflected on your credit reports.

Be prepared to make a few calls before you come to an agreement. You’ll need to be convincing and purposeful in your approach to persuade them. You’re ultimately trying to convince your creditor that it’s worth it for them to reduce your debt, and you may not be able to resolve the settlement with just one conversation. 

If you previously sent a hardship letter, your creditor may already have an understanding of your financial situation or life events that may have affected your ability to make payments. If not, you’ll need to clearly outline the financial hardship that you’re experiencing when you’re negotiating.


Lastly, it’s crucial to get all the terms outlined in writing from your creditor before you make a payment. This holds the creditor accountable to honor the agreement, and holds you accountable to pay according to the debt settlement plan.
Because each financial situation is different, we’d highly recommend you speak to one of our certified Financial Coaches to explore your options. Talking to our coaches is always free – just sign up and request a coaching session right from your personalized Money Sensei™ dashboard! 

Is debt settlement worth it?

Debt settlement is not for everyone, but it could be worth it if you’ve explored all of your options, as there are many pros and cons to consider:

Pros

  • It helps you lower your debt
  • It reduces multiple monthly payments into one monthly payment
  • It helps you avoid bankruptcy, and provides better repayment terms than bankruptcy
  • It helps you stop creditors and collectors from contacting you

Cons

  • Your creditors might not negotiate your debt
  • You could end up with more debt (interest and fees still accrue during the negotiation process)
  • Forgiven debt may be considered taxable income
  • Your credit score may be negatively affected

Debt settlement FAQs

Am I eligible for debt settlement?

You may be eligible for debt settlement if you have more than $7,500 in unsecured debt. Our coaches can help you determine if debt settlement is a good fit for you.

How long does debt settlement take?

Debt settlement can eliminate debt in as few as two to four years. Compared to other debt options, which could take up to 9 years to eliminate debt.

How much does debt settlement affect your credit score?

Debt settlement can lower your credit score by up to 100 points at first, with less of an affect as time goes on. The impact of debt settlement on your score varies based on your current credit standing.

How long does debt settlement stay on your credit report?

Debt settlement stays on your credit for up to seven years. The impact on your score minimizes overtime.

Can I buy a house during debt settlement?

If you are pursuing debt settlement, to begin with, then you’re likely unable to make payments on existing debt. Your credit score was negatively affected (or will be), and it’s unlikely you’ll secure a mortgage at the best available terms. While you could try to purchase a home during debt settlement, it’s a better idea to take care of an existing debt, repair your credit score, and purchase one after debt settlement.

Resources

Debt

Is Debt Settlement a Good Idea?

Debt settlement is often portrayed by settlement companies as a magic bullet for anyone drowning in debt. But the truth is, debt settlement is only an ideal debt solution if :

  • You have $10,000 or more unsecured debt
  • You’re frequently late on debt payments
  • You’re having trouble making the minimum payment amounts every month
  • You cannot afford your debts and are considering bankruptcy

There is a difference between debt management and debt settlement, so make sure you know which one is right for you. 

How Does Debt Settlement Work?

If you decide to use debt settlement to handle your debts, you or a third-party company will reach out to your creditors to negotiate a new repayment plan. This new payment plan will be based around a smaller total amount than your original debt. In exchange for paying less, you instead agree to make a single, lump-sum payment to pay the debt off completely.  Once the agreed-upon amount is fully paid, your account is marked “settled” on your credit report. This process usually takes 2 to 4 years and can help you avoid bankruptcy. 

Learn More: Debt Settlement

Is Debt Settlement Bad For Your Credit?

Debt settlement can have both a positive and negative effect on your credit. For some strategies, your credit score may get worse before it gets better.

Many debt settlement companies advise you to skip your payments in order to save up to pay one large sum. However, there is no guarantee that your creditors will agree to this payment method, and they may begin to report your delinquent payments to the major credit bureaus. This results in a negative effect on your credit history and a lower credit score. 

As you pay off the debt, your credit report will begin to show active, on-time payments over time. This shows that you are responsibly using your credit and will reflect positively on your credit score. 

Furthermore, using debt settlement is one of the main ways to avoid filing for bankruptcy. While debt settlement notations stay on your credit report for seven years, bankruptcy notations stay on for 10 years.  Bankruptcy has a longer-lasting effect on your life regardless of the changes you make. 

Alternatives to Debt Settlement

According to a study by the American Fair Credit Council, 95% of debt settlement clients receive savings in excess of fees, with an average save of $2.64 for every $1 in fees paid. With statistics like these, you might believe that reaching out to a debt settlement company will help you get rid of debt and fix your credit once in for all. 

However, debt settlement does not work for everyone. Every financial situation is unique and may require a specific way to handle your debt issues. There are several debt solution alternatives to look into before you decide on the best course of action:

Debt Management Plans

A debt management plan (DMP) is a program aimed towards helping you pay off your debt fast. Entering a DMP will give you access to a qualified coach who will help you:

  • Create a budget
  • Create a financial plan that fits your needs
  • Track your progress
  • Work with creditors on creating better payment plans
  • Stop collection calls

Unlike debt consolidation, you do not need good credit to qualify for a DMP. While this program does not have any direct effect on your credit, the actions you take while in the program may have a temporary negative affect. However, if you stay on the plan and make on-time payments, your credit history will improve over time. 

Debt Consolidation

Debt consolidation is the act of taking out a loan to pay off multiple debts at once. This would eliminate the need to pay multiple monthly payments and instead only require you to pay one. 

Ideally, this new loan would have a reduced interest rate and will help you pay off your debts quickly and efficiently. 

However, not everyone is qualified for debt consolidation. You need to have a high credit score and a good debt-to-income ratio. If you’re already experiencing financial difficulties, you may not qualify for a debt consolidation loan. 

Balance Transfers

A balance transfer is the process of paying off one credit card debt with a new credit card. There are several benefits to moving your debt from one card to another, including:

  • Consolidating multiple payments into one payment 
  • Potentially receiving a lower interest rate
  • Earning rewards points on a new card for repayment

However, you should be careful before you apply for a second or third card. New cards typically come with 3-5% balance transfer fees. These fees are added to any other fees you may be required to pay, including signup fees or APRs. 

And while signing up for a new card may give you a better interest rate, it may only be an introductory rate. When the introductory period expires, your interest can shoot up to be much higher than the rate you paid before. This encourages you to completely pay off your transferred credit card balance before the promotional period ends. 

Finally, there is the danger of falling into the moving-debt-around habit. Every time you transfer debt from one card to the next, the debt does not go away. In time, you may find that you’ve paid more in fees and added interest than the original amount owed. This path can quickly move you towards bankruptcy. 

DIY Debt Negotiation

If you feel confident, you can also tackle debt negotiation by yourself. This could help you avoid having to spend any more money on third-party fees. 

However, your lending company is under no obligation to provide any alterations of your loan terms. Negotiating for an alternative payment plan or lower fees may not work. 

Before you talk with your creditor directly, take a look at all of your debts. Organize them by size, length, and repercussions for not paying. This will allow you to decide which debts to negotiate for first. 

When you reach out to your creditors, provide alternative pay-off terms that you wish to use. This may include paying a smaller amount every month, a lump-sum settlement amount, or a settlement in installments. You can also request an end to collection calls and letters.

Remember to document every step of your process, and bring any sort of documented proof of income with you. The Consumer Financial Protection Bureau ‘CFPB’ of the U.S. Government advises that you record your conversation with the debt company (with their consent) so you have proof of the agreement.

Rebudgeting

Some people have enough money to pay the bills but struggle with handling it correctly. Luckily, the best way to determine if you actually can afford your debts is to sit down and create a budget. 

To set up a budget, start by tallying up how many monthly bills you have and subtracting it from your monthly income. Keeping these bills and due dates written down will help you keep track of what you need to pay and when. It will also help you determine how much money you have leftover each month to do whatever you would like with. 

Need some help setting up a budget? Take our free budgeting class. This course includes the basics of budgeting, tracking your spending and establishing goals.

Credit Coaching

Whether it’s a job layoff or a medical emergency, maxing out your credit cards when you need help can seem like the smart move. But if using credit cards is your go-to answer, credit.org offers free credit coaching that provides you with personalized financial guidance. Our coaches review your entire financial picture, including your budget and all your debts, and help create a plan that’s right for you.

Learn More: Credit Coaching

Find the Debt Solution That’s Right For You

If you’re struggling with debt, you may be looking for a way to fix things fast. While debt settlement may seem like a cure-all for your needs, there may be better options available. 

Don’t make the mistake by taking the wrong financial path. Reach out to one of our debt coaches and learn how you can take control of your debts and become debt-free fast. Re-start your future today.

Resources

Debt

How a Debt Management Plan Affects Your Credit: Pros and Cons

Paying off large amounts of debt can be a daunting task. If you’ve recently fallen behind on payments, have more cards than you can manage, or have payments that are too high, rest assured – you’re not alone. 

There are a number of debt relief options available for those looking for help to get out of debt fast. One of the most effective options is using a Debt Management Plan (DMP). 

But do debt relief programs like Debt Management Plans hurt your credit? Before deciding which debt relief option is best for you, be sure to explore the following pros and cons of using a debt management program. 

How Does Debt Relief Work?

Debt relief (or debt settlement) is a program offered by third-party debt relief companies to borrowers struggling to make debt payments. Typically, these companies encourage borrowers to use money meant for debt repayment for savings or for other bills and obligations.

While the borrower is saving, the company attempts to negotiate with creditors for lower interest rates and monthly payments on the remaining amount is owed. In theory, this creates a more manageable payment plan for the borrower and a full repayment for the lender.

However, these programs do not always go as planned. Many times debt relief companies are not able to negotiate a lower payment for all of your debts. This can have a drastic effect on both your credit and your financial security:

  • You may end up paying large fees to the third-party company
  • You may incur late fees on the debts you owe
  • You may burn bridges with future creditors
  • You may have to pay fees in a third-party bank account
  • You may have a debt collection lawsuit filed against you
  • You may have a negative impact on your credit score

How Do Debt Management Plans Work?

An alternative to a debt relief program is a Debt Management Plan (DMP). Credit counseling companies such as credit.org offer Debt Management Plans to borrowers who are struggling to make multiple or high monthly payments. 

Unlike many third parties, credit.org works directly with every client to determine the best ways to handle every financial situation. If you qualify for a DMP, a debt coach will negotiate with creditors on your behalf to help get you lower interest rates and monthly payments. 

When you agree to take part in a debt management program, you also agree to close all of your current credit accounts. A notation is made on your credit history to indicate to lenders that you are on a DMP and cannot have any new lines of credit. This notation is removed once you complete or exit your DMP. 

How Does a Debt Management Plan Affect Your Credit?

The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does have an effect on your credit history, it does not have a lasting negative effect on your credit score.

When you agree to close all of your credit accounts, your credit history stops. Lenders and credit agencies like FICO and VantageScore use your credit history to generate a credit score. A temporary pause in your available credit may have a negative effect on your score.

However, once you’ve left your DMP, the freeze on your credit is removed, and you can continue to apply and use your credit. The notation signifying your DMP activity does not have a negative effect on your score going forward – in fact, it may suggest to lenders that you actively work to pay all of your debts to the best of your ability.

Additionally, DMPs are designed to be paid off with regular monthly payments over approximately 4 years. When you sign up for a DMP, your monthly payments are automatically taken out of your bank account every month. These timely payments over the course of years will have a very positive impact on your payment history. 

Credit Score Breakdown

If you’re curious to see exactly how much of an effect a DMP has on your credit score, take a look at this approximate credit score breakdown:

  • 35% of one’s score is payment history, which will be positively affected as long as DMP payments are made on time every month
  • 30% of the score is based on amounts owed, or credit utilization,  which will be positively impacted as the balances are paid down
  • 15% of the score is the length of credit history, which will suffer under a DMP when accounts are closed
  • 10% of credit score is based on inquiries for new credit, which the client will not have while on a DMP
  • 10% of a credit score is one’s credit mix, which is unique to each individual

You should also keep in mind that a DMP has required monthly payments. If you do not continue to follow your plan, there will be a significant negative impact on your credit history and subsequently your credit score. 

Learn more: What is a Good Credit Score?

Debt Management Program Pros and Cons

Debt Management Program Pros and Cons

Pros
Cons
Doesn’t directly impact creditWill not be able to get new credit
Provides debt solution without direct impact to credit scoreAffects the length of credit history
Consistent monthly payments improve credit scoreAll credit account will be closed
Amount of debt will be significantly reduced
Debt is paid off significantly faster

Enrollment in a debt management plan doesn’t affect one’s credit score. However, certain facets of the program — timely payments, closing accounts, smaller amounts owed, and changes in utilization rate — may impact one’s score in both negative and positive ways.

Ultimately, clients who graduate from our Debt Management Plan have little trouble securing new credit and loans. If you’re ready to take control of your financial freedom, contact our expert debt coaches today.

Translate »