Impact of Debt Management and Debt Consolidation on Credit
After the recent economic turmoil, people are falling into overwhelming debt because of the temporary phase of unemployment or high medical bills. And thus, people are constantly looking for the ways to come out of the debt. However, fortunately debt management and debt consolidation are the two most effective avenues to eliminate the debt but they have two different approaches towards the debt, and have different impacts on credit. Let us find out their different approaches and their different impacts.
Brief view on debt management and debt consolidation program:
In a debt management program, after you hire the services of a company they approach the creditors, and negotiate with them to reduce the rate of interest. They even try to waive off the late fee and charge-off from the debts in order to lower the monthly payment. In addition to this, the debt management companies provide you a monthly budget plan so that you can proceed towards the way of stabilizing your finances.
On the other hand, debt consolidation is another viable way to eliminate the debt where the high interest debts are consolidated into a lower interest loan. After you hire the services of a debt consolidation company they merge the debts into one fixed monthly payment at a lower interest rate. This makes easier and convenient for the debtors to pay off the debts. The debt consolidation companies also become a mediator after being hired, and approach the creditors not to contact the debtors regarding the collection of debts.
Effect of debt management and debt consolidation on credit score:
In a debt management program, as your interest rate gets reduced and the late fee gets waived off you need to pay lesser amount than what is originally owed to the creditors. Under any circumstances, if you pay less than the original debt owed to the creditors then the latter note on your credit report “not paid as agreed.” This causes difficulty in acquiring new credit, and thus the chances of improving credit report by obtaining new credit also become limited. Negative note on the credit report stays for almost seven years. Despite all these, debt management program eventually helps to improve the credit report when you gradually clear the debts.
There is a very little or no negative effect of debt consolidation on credit report as you pay the full amount of debt owed to the creditors. Thus, your credit report appears as “paid in full.” Consolidation can affect your credit report if you close the accounts after being paid, as the closed accounts can shorten your credit history. Apart from this, if you pay your accounts late or if you miss to pay the accounts then your credit report can also be hurt.
Debt management is different from debt consolidation in terms of paying the debt. However, both the programs can improve or ding your credit report depending on what you do after entering the program.
