To stay or not to stay in a debt management plan
By Erica Sandberg
July 23, 2015
Two years ago I got into deep financial problems and went to credit counseling. I closed all of my cards and started to pay them with the company. They really helped me through a terrible time in my life. I almost did Chapter 7 bankruptcy. I am now in a much better financial shape and can pay off the rest of my debts in a lump sum. The question I have is this: To build my credit should I keep with credit counseling or pay my debts off all at once? — Andy
I'm thrilled that your life has taken such a positive turn. People in distress often have a hard time seeing the light at the end of the tunnel and give up prematurely. You exemplify why one should try all reasonable options before turning to legal solutions. I've got nothing against bankruptcy, but it's for people who genuinely can't pay their debts.
You're in an ideal position to hike up your credit scores, too. In fact, those numbers are probably higher than they were way back in 2013. There are two main reasons for this:
- On-time payments. The agency you've been working with has been making sure you've paid according to schedule. You send one payment to them, and they distribute it amongst your creditors. Additionally, they usually expect the amount to be automatically withdrawn from your checking account, on the same day of every month. Consequently, if your credit card accounts were delinquent when you arrived at the agency, you got back on track beginning with the first installment. Since payment history is the most important factor in a FICO score, you've been helping it along for quite some time! The credit card companies have been notifying the credit reporting agencies of your actions all along.
- You owe less money. The repayment program that credit counseling agencies offer helps people satisfy their financial obligations. Not partially as with a settlement or not at all as you would with the Chapter 7 bankruptcy, but 100 percent of the accounts you included in the payoff plan. FICO assesses the amount you owe in relation to the amount you can borrow, so closing the accounts might have negatively impacted your scores in the beginning. However, lenders want to see that you are not overextended. Paying down your obligations definitely increases your credit rating.
To hike up your scores further, you'll need to start to use credit again. Before you do, though, delete the rest of what you owe by calling the credit counseling agency and notifying them of your intentions.
Chances are the credit card companies you're paying are still charging some in interest, and the agency is likely charging an administration fee. I see no reason to pay more if you don't have to. If the credit card companies had been attaching a notice to your reports that you were paying with help of a third party, they will stop when you end that relationship. These notices aren't a scoring factor, but some lenders don't like to see them at all.
After that, check your current scores, available at myFICO.com for about $20 per report. Review the cards that match your rating, then apply for the one that suits your lifestyle. As soon as you get it, charge and repay, always on time and in full. Every time you do, you'll be adding positive information to the reports, which will be factored into your FICO and it will continue to climb.
As a former credit counselor, may I suggest a nice note to the agency that gave you the tools you needed to stay solvent? Trust me, the people who work at these nonprofits love to hear success stories!
Got a question for Erica? Send her an email.