Credit ratings affect many aspects of modern life. The availability of future credit is determined largely by payment histories and credit ratings. Potential employers use FICO scores to qualify applicants. Insurance companies use credit ratings to evaluate risk and increase premiums. As a result, anyone who has poor credit experiences more difficulty in day-to-day living than people who have average scores. However, the effectiveness of debt consolidation is not diminished by a poor credit rating.
Debt consolidation does not necessarily require qualification for a new loan. Two types of plans are widely available for people with unsecured debts and poor credit. Monthly payments due on unsecured obligations are frequently reduced by 20% and up to 65% using these plans. In addition, credit ratings are relatively unimportant if considered at all.
Management plans are a type of debt consolidation that combines existing unsecured obligations under the administration of a third-party service. Once combined, one monthly payment is made into the plan that is later disbursed to lenders. Savings of 20% are easily achieved by negotiating discounts for monthly interest charges and potentially the forgiveness of a portion of late fees owed. In most situations, the full balance of all existing principal is repaid. To participate, each client must pay a small monthly administration fee that typically ranges from a low of $30 up to approximately $50. Plans that do not charge a setup fee are widely available.
Settlement plans also combine unsecured obligations under the administration of a third-party service. These plans however usually result in substantially larger payment reductions for unsecured obligations. The larger reductions result from more a more aggressive negotiation technique and usually include a partial waiver of principal. For example, credit card payments may decrease by 50% to 70% and repay all remaining balances ahead of schedule. Settlement plans also require participants to pay a small monthly administration fee and additionally include a substantial setup fee. The setup fee is intended to cover the cost of extensive investigation of a client’s financial condition and all required negotiations.
Once enrolling in a management or settlement plan, credit ratings typically drop initially. The decrease occurs because less than the total amount of all charges is repaid. Nevertheless, credit ratings begin a steady climb higher with each passing month so long as payments are made on time. Over two years, many participants receive a much higher credit rating because of a history of timely payments and the full payment of all unsecured obligations.
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