Can Debt Management Affect Credit Rating?

Can the debt management program you chose affect your credit rating?

There are a lot of criteria to consider when trying to decide which debt relief option makes sense for you. Are you eligible? What kind of debt can you include? What are the costs? How long will it take? And, perhaps most importantly, how will it impact your credit for the future?

“While there are numerous benefits to seeking credit counselling and entering into a debt management program, you will have a negative impact on your credit. While this shouldn’t necessarily deter you from participating in credit counselling, it is important that you have all the accurate facts before you make a decision regarding debt relief,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.

To find out how debt management will impact your credit rating and how it can set you up for a debt-free future, call us at or get started with our free online debt analysis.

 

How debt management will affect your credit rating

 

When you enrol in a debt management program, a note will be made on your credit report. Creditors will be able to see that you are seeking credit counselling, which can make it more challenging to qualify for credit during your debt repayment period and for a period afterwards. When the debt management program is completed and the debt is repaid, the note doesn’t automatically fall off of your credit history. It varies, but you can expect for the note to remain on your credit report for two to three years after your debt management program is completed. Generally, you can expect the note to remain on your credit history for about six years total.

 

If you are entering a debt management program with good credit, this could be a concern. However, most people that enrol are already experiencing problems with debt repayment, so the negative consequences on credit are less impacting.

 

“Participating in a debt management program can actually be good for your credit in the future. You are repaying your debts in full and with the help of your credit counsellor, will be paying your debts on time every month. Credit scores are compiled of a number of factors, and a debt management program actually assists with two of the largest ones: timely debt payments and low/no debt balances. Additionally, you’ll learn real-life skills that can help you to responsibly manage credit in the future. All of these factors can help to repair your credit in the future,” says Schwartz.

 

If you continue to try to repay debt on your own and continue to miss payments, you will rack up multiple penalties on your credit report, which can be just as damaging, if not more so to your credit report.

 

Other debt relief options, like consumer proposals and bankruptcy, can have a longer-lasting negative impact on your credit. You are repaying your debt in full with a debt management program, which is a checkmark in your favour.

 

Having a note on your credit report because of participation in a debt management program isn’t necessarily a bad thing. While it might make it harder for you to qualify for credit and might make you subject to higher interest rates, the inability to load up with debt without a plan in place or adequate financial resources can help you maintain your financial health.

 

How debt management works

 

If you are dealing with debt and are unable to qualify for a traditional consolidation loan, a debt management program can be a good option.  Typically, a debt management program is best suited for an individual who can afford to repay their debt but is having trouble keeping up with their current debt payments. They would benefit from a longer timeline to be able to repay their debts. Most debt management programs are completed within a four year period.

 

Your credit counsellor contacts your creditors on your behalf and negotiates repayment terms. Usually, they are able to reduce interest rates and/or get late fees or other charges waived.

 

In a debt management program, all of your unsecured debt is consolidated, and you make a single payment every month to your credit counselling agency. In turn, your credit counsellor will disburse the payments to your creditors on your behalf.

 

Benefits of debt management

 

There are numerous benefits to debt management. You have the convenience of paying a single payment every month, which will accelerate your debt repayment timeline. It’s also easier to budget for and to keep your finances organized. You will pay less in interest and also save on late fees. You’ll have lower monthly payments, increasing your cash flow and making it easier to live a cash-only lifestyle. On average, people cut about 30-50 percent off of their monthly debt payments by participating in a debt management program.

 

As part of credit counselling, you will receive ongoing support from your credit counsellor, which includes access to financial literacy resources. You will learn about savings and budgeting and how these are both essential tools in remaining debt-free in the future.

 

If your debt has been sent to collections, creditors are not required to stop trying to collect from you, but in many cases, your credit counsellor can negotiate this on your behalf as well. It helps if you are working with an established credit counselling agency that has good relationships with creditors. Once creditors see that you are motivated to repay your debt and that you are being proactive by seeking debt relief through a debt management program, they will often agree to stop trying to collect the debt from you.

Debt management programs are flexible as well. They aren’t legally binding like some other debt relief options, which means that if your circumstances change (i.e. if you lose your job) your credit counsellor can renegotiate the terms of your repayment with your creditors.

This debt relief option will help to reduce debt stress and help you achieve your financial goals more quickly.

Does a debt management program make sense for you? To learn more, contact one of our trained credit counsellors at or check out our free online debt analysis .

 

 

 

 

Press Inquiries

pr@consolidatedcredit.ca
1-800-656-4120 x 1064