Are there debt consolidation companies for poor credit scores?

Submitted by Sara K.

A Debt Management Plan (DMP) that is offered by a non-profit credit counseling agency can be an excellent tool for getting out of debt. Anyone can use these plans, whether they have poor credit or great credit. Credit cards, collections, and medical debt are eligible for these programs.

How a Debt Management Plan works

Every month, you make a payment to the agency, and then the agency in turn sends a payment to each of your creditors. That means that every 30 days, the creditor is getting a payment.

Because you are working with a DMP and not going to a debt settlement company or filing for bankruptcy, your creditors are motivated to work with you. Often, they will either lower the monthly payment they are requesting, lower the interest rate, or both! Each creditor tells the plan what they are willing to do.

You are paying back the full amount of principal, but with a lowered interest rate. That makes it easier to tackle this debt much more quickly. By law, each credit card must be paid in full in 60 months.

How a Debt Management Plan can affect your credit

The DMP does not report to the three major credit bureaus. However, because the debt remains with your creditors, they continue to report the payment every 30 days. This can build your credit history.

If you are already behind when you come into the plan, some of the creditors will even age up the account once they have received two to four payments. This is basically a fresh start, as they will no longer report you as late. If the card isn’t eligible for a re-age, you are encouraged to slowly make up the past due amount by paying a little extra each month. The late fees stop when your credit card is enrolled in the program, so paying $10-$20 month will make a difference.

Your credit cards will be closed when they go into the plan. You might see a small dip in your credit score because of this. But because you are continuing to make a monthly payment you can afford, you are building a great credit history. And because the interest rate is lower and you’re paying back so much more of the amount you borrowed, your credit score will most likely rebound and improve. Payment history and amount owed make up 65% of the calculation for your credit score. A DMP helps in both of these areas.

How much does a Debt Management Plan cost?

There is a small fee associated with plan. The state you live in will determine that fee. These plans are administered by non-profit agencies, but they do have to keep the lights on! The savings of interest on the credit cards will likely cover the cost. Plus, the counselor you work with will be able to disclose this information to you before you enter the program.

If you’re interested, find a non-profit Debt Management Plan administrator in your area.