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does debt consolidation affect your credit score?

Date: Wed, 08/18/2010 - 08:55

Submitted by bcamp2908
on Wed, 08/18/2010 - 08:55

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Total Replies: 5


I owe about 50,000 in credit card debt. I am not sure if I should try to take out a loan at 10.5% or call a debt consolidation company.


Debt consolidation is NOT debt settlement. It is a totally different process.

Debt consolidation does mean two things....you take a loan out from a bank and pay everyone off in full. Your credit remains unblemished. The second is debt consolidation or debt management...you go thru a third party company and they negotiate your interest and payments for you. It will tank your credit score.

Debt settlement occurs when you pay less than what you owe...it will damage your credit score also.


lrhall41

Submitted by SOAPLADY on Wed, 08/18/2010 - 11:40

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Debt Samaritan, You need to be careful how you use terms. Debt Consolidation is not some generic fits all term. Using official terms properly will ease the confusion about this industry. The debt settlement industry routinely uses real terms in a deceptive fashion. That is part of the reason they are in such trouble with the feds.

A debt management program or plan as defined by the Office of the Comptroller of the Currency (OCC), a Federal Agency does NOT damage your credit.

Many people automatically think of debt consolidation as a loan or new debt.


Debt Consolidation LOANS are not a good idea at all. If you can get one, they do not negatively impact your credit. You do have to pay it the same as any other loan. The problem with a DC Loan is there is no requirement to close the accounts that are paid off with the proceeds of the loan.


A more common form of debt consolidation reduces your interest rates and converts your revolving accounts in to installment accounts. The Office of the Comptroller of the Currency advises and audits banks compliance with federal guidelines. Since 2003 those guidelines require creditors to work with debt management companies in assisting consumers seeking debt relief. The OCC has established terms most creditors follow. The OCC guidelines are not Law. But institutions that do not follow these guidelines have to have good reason not to, including documenting instances where they did not follow them. It is much easier for them to follow them, then to fight it.


As it stands today creditors must make whatever changes they want to so a consumer entering a debt management plan can payoff their unsecured debt within 60 months. Most of them have opted to lower their interest rates and have established a minimum percentage of the balance to determine the Debt Management Plan minimum payment. I know of none that forgive any portion of the balance, though they could, they don't do that.


Real interest rate reduction from as high as 30% to 0% and 1% happen daily. These terms are not available to consumers seeking "hardship" programs. Hardship program terms are temporary, usually less than 12 months. Terms in a Debt Management Plan are for the life of the program.


One major creditor offer these terms: example $5000.00 debt
2% of the balance for a minimum payment = $100.00
6% APR
This give a monthly payment of 100.00+ interest = $103.00/month for 56 months


Another major creditor offer these terms: example $5000.00 debt
1.8% of the balance for a minimum payment = $90.00
1% APR
This give a monthly payment of 90.00+ interest = $92.00/month for 56 months



Of course larger payments can be made anytime.


The end result of this is you have paid your debt in full. Creditors do not punish you for paying in full, so your credit score goes up.


Having said all that, debt management plans are not for everyone. You do have to be able to make payments. There is some extra flexibility in DMP, but missing payments is not one of them.


If you cannot make the DMP payment you may need to talk to a bankruptcy attorney. DEBT SETTLEMENT IS NEVER AN OPTION for anyone that expects to need to use credit. The damage in a "good" debt settlement is worse than bankruptcy. I don't like bankruptcy. Some people need a clean break and bankruptcy offers that. Settlement does not. The law suits, collection calls, wage garnishment actions go on for years. There is no good reason to subject you and your family to that.


Debt Settlement, debt arbitration, debt resolution or any other name or process that is designed to pay a creditor LESS than owed will destroy your credit.


lrhall41

Submitted by on Thu, 08/19/2010 - 11:00

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Hmmmm.

The following is posted with author permission. Please read it in the context that it applies to the individual who can no longer make timely payments:

Debt Relief Options vs. Your Credit Report
One of the biggest concerns for Americans who are struggling with debt, and looking for solutions to get out of debt, is their credit score. The question that I’ve heard most frequently over the years of working and consulting with consumers is; what will “this” do to my credit report? My answers are generally pretty enlightening, and because there are so many misconceptions, and even people willing to mislead consumers in order to sell them on some approach, I want to lay out some facts.
Let’s start with this fact: Risk aversion by lenders, in the extension of credit, has returned with a vengeance! This means that if your Debt to Income (DTI) is unhealthy, you will frequently find that additional credit is unavailable to you regardless of your credit score. Many consumers are finding that existing credit lines are being cut down to current balances and unused accounts are being closed. There is much more to discuss on this topic, but for the consumer struggling with debt my point is; stop thinking about your score. Additional credit availability is unlikely right now, anyway.
The credit score has been so indoctrinated into our consumer based society; people make irrational decisions, negatively impacting themselves and their families, all in the name of the all mighty FICO. So, as if through a megaphone from 10 stories below; “Put down that credit report and step away from the ledge”!

If you’re struggling with debt, whatever the hardship, and are forced to consider your options, I will lay out the legitimate options and outline the effects to your credit.
Debt Management Plan (DMP, sponsored by for profit or nonprofit credit counseling companies):
Your accounts that are accepted into the program will be closed and this will have a slight impact on your score. While enrolled in the program, it is typically very tough to get financing of virtually any nature in the first 24 months, due to the DMP notation in your credit report, next to each of the accounts enrolled. Debt Management Programs run, on average, 5 years. You are basically in “unsecured credit purgatory” for this entire period (such as obtaining new credit cards). You may be able to get financing on a vehicle or even purchase a home, modify an existing home loan, or qualify for a student loan (either your own or parental) after the first 2-3 years of successful participation in your DMP. When an account in your DMP is fully paid, the DMP notation is removed. This is a good option, if the math supports your finances (more on the math in a moment).

File Bankruptcy:
Chapter 7 – will stay on your credit report for 10 years. This does not mean you won’t have access to credit for the full 10 years! This is one of the biggest misconceptions out there, and partially what motivated me to write this. There are many reasons to try to avoid bankruptcy. Your ability to get credit in the future is one of the flimsiest. Up until the economy started crashing in 2007, consumers who discharged debt in a chapter 7 were finding unsolicited credit offers in their mailbox within 6-12 months of discharge. The credit offers were generally subprime, so not the best limits and rates, but were offered nonetheless. With the return of risk aversion, and many of the subprime credit card issuers having left the market, I don’t see these solicitations for credit just outside of bankruptcy being offered much, at the time of this writing. I find them even less likely moving forward, as banks will be repairing their balance sheets for years to come. Besides, having just obtained discharge of unsecured debt, one should not be in a hurry to obtain more, and most certainly not at subprime rates.
Current FHA underwriting standards mean you will not qualify for FHA funding after filing bankruptcy for a period a 2 years. It is, therefore, unlikely you will get a loan for a home purchase in this time frame, given the current loan market. Student loans are generally off the table for a few years, including ones you would apply for in order to assist your child. You may be able to finance a vehicle purchase after a chapter 7 within 12 or so months after discharge.
Your credit score is factored on several data points. Roughly a third of it is reportedly factored on utilization/Debt to income (DTI). After discharging debt in a chapter 7, your DTI and utilization should be fabulous. Now, you wait out some of the 2-3 year timelines lenders and underwriters use as a standard, take a few effective steps to rebuild credit, and this whole 10 year misconception is seen for the baloney it is.

Chapter 13 – is totally different. It’s the worst of all options. The court is overseeing a repayment plan of 3 or 5 years. It’s on your credit report, you’re on a court approved household budget, and if you were to seek a new credit contract of virtually any type, you must first get approval from the court appointed trustee, who has been empowered to tell you “NO”. This version of bankruptcy is credit purgatory. It is rigid and inflexible. You will have court protection from creditors, but at the highest cost. It is an option, but should be seen as a last resort.
Debt Settlement:
Settling debts for less than the balance requires you to be behind in payments. Since another third of your credit score is factored on repayment history, your credit report and score is going to get clobbered! The clobbering itself and the duration of the pain will be different for each person. Once you achieve zero balance reporting, your credit score will begin to improve. How long it will take to improve will depend on several factors, such as:


  • How long you went delinquent before a zero balance was reported
  • Was the account charged off (settling debt inside of 6 months delinquency is optimal)
  • Was it sold after charge off and re-reported (original creditor reports the charge off and the debt collector reports as well)
  • What accounts were current during the settlement process (mortgage, car payment, other)
  • What was the depth of your positive credit history (have you had cars, mortgages etc… paid off in the past)
  • Did you take prudent steps to rebuild credit along the way

My experience has shown that roughly 18 months after completing the last settlement, and the zero balance due reporting, you’re in decent credit shape again, when contemplating legitimate needs. I have worked with individuals who have qualified for FHA funding on a new home purchase 9 months after finishing their settlements (focusing on the above 6 items) . The primary reason for this is that your debt to income is in better shape, and the math shows you can comfortably service the mortgage. This aspect should be considered by those who have been turned down for a modification on an existing home loan based on their DTI, and who have resources that can be creatively deployed.
Summary:
These 3 options are what a consumer, who cannot keep up with payments, has to consider. The fact is; every one of them is going to hurt your score. Even just slogging along and struggling to meet your minimums is going to keep you from any new credit, based on a poor DTI ratio, regardless of the FICO score. The days of fog a mirror – and get credit – are gone.
Basing your decision on which option to go with because of the affect on your credit report, is like arguing over whether to punch a one foot or two foot hole in the bottom of the boat while at sea. The boat sinks no matter what.
These 3 options actually track pretty well when you boil them down to which one will put you in position to obtain legitimate loans, like a home/car purchase or student loans, the quickest.
The point is, when you are drowning in debt and are worried about your credit score, you’re worried about the wrong thing.
The media, lenders, regulators, unwitting commentators, have all contributed to the credit score hype. Sure, it is important when you are out shopping for loans and better interest rates, but that’s not what someone who cannot keep their payments up should be thinking about. They are not going to get credit, and they cannot service the additional debt anyway. Anyone saying something different is talking up their book, has the luxury of not struggling with debt, or is a pump monkey for some special interest.
When determining which debt relief option will best suit your situation, and you’re mid-to-long term goals, always start with the math. The math doesn’t lie and should assist you in narrowing down which option is best.
Chapter 7, for those who qualify, and who fully understand all of the implications associated with filing (sans the credit score), will provide the quickest, most thorough relief.
Other than a discharge through bankruptcy, my experience would suggest that consumers weigh and compare a debt management plan (DMP) beside a debt settlement approach, and make a rational decision based on the math and the flexibility that is built into either option. Settlement will generally win this test. When doing the math to qualify for a DMP, traditionally you will need to factor your ability to consistently and comfortably make a monthly payment of 2.5% of your current unsecured credit card balances. Due to the current economic crisis, you may find plans that factor 2.1%. If you cannot, or question your ability to maintain this type of payment, I question why you would even start a DMP. You have a high probability of not completing it and will have wasted resources that would have contributed to your success using a settlement approach and the ability to regain your financial freedom sooner.
If you are considering settlement, be sure to consider the hype and fees associated with its pump monkeys, too. You will often find the DIY approach to settling with your creditors far more beneficial.


Mileage may vary


lrhall41

Submitted by on Thu, 08/19/2010 - 18:05

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"Someone Else's" post above is one of the most thorough - and correct - that I have come across in quite awhile. "Razor555's" however, is not. DEBT SETTLEMENT is NOT, I repeat NOT, "credit suicide". Forums like this are a chance for people with limited, and often times completely incorrect, information to sound off and make themselves feel smart. If you are struggling with debt, as I was, stop reading the forums and go to more professional sources. Lawyers and Non Profit credit counseling services can give much more accurate information pertaining to how Debt Management Programs, Debt Settlement, or Bankruptcy can cure your current credit woes and the affects they will have on your ability to receive credit in the future.

Now for my two cents. NEVER deal with a Debt Management Company that is not Non-Profit. Even the NP companies will charge a minimal fee, but it is nothing compared to the others. Most of the time you should be able to deal with your creditors yourself. I was in debt to Chase, Citibank, HSBC and Discover and they all worked with me once I called and explained I was no longer going to be able to pay the monthly bills.

Their offers ranged from 0% hardship programs over the course of 5 years to pay down the balance to debt settlement at 50% of the outstanding debt. I was in a more beneficial position than most. Although I had recently lost my job I had substantial assets I could sell off. I chose the debt settlement path, paying $40,000 off a total of $80,000 in debt. Yes, these settlements appear as "Settled for Less Than Full Amount" on my credit report (Except for Discover - Their report says "Paid in Full" with no 1099C to fill out.)

I've been debt free for almost a year now and my credit score has slowly started to go up. So, IMO, debt settlement is an excellent alternative to bankrupcy or letting charge offs just sit on your report forever. Also, I am now working with a Debt Repair company that promises to fix my credit even further.


lrhall41

Submitted by on Fri, 03/11/2011 - 05:41

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