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Cards maxed out for 10 years? Perhaps you need a plan

Jane McNamara

Dear Let's Talk Credit,
I am considering entering into a debt management plan due to maxed-out credit cards. I am not making any progress on the balance. Just paying interest only the last 10 years is killing us! How will this potentially affect my credit (negative) and how long will my being in a debt management plan remain on my credit report? I have been told if I enter a debt management program I may as well just file bankruptcy. I want to pay my bills, but can't get out from under this interest-only revolving door! -- Kevin

Dear Kevin,
Having spent the past 30 years working in the nonprofit credit counseling world, I believe a debt management plan may be a good solution for you and your credit card debt. Be sure to visit with a certified credit counselor at an accredited nonprofit agency to explore your options for resolving your issues.

If you decide to enter into a debt management plan, the good news is that the notations on your credit report for the accounts, included in your debt management plan, are not factored into your FICO credit score. In addition, once you complete your debt management plan, the notations are removed from your credit report. However, your credit score may drop slightly at first, because the accounts included in a debt management plan are closed by the card issuer.

In comparison, a bankruptcy notation on your credit report factors into your FICO credit score and may lower your score by 200 points or more. A bankruptcy can remain on your credit report for as long as 10 years.

Because your creditors make concessions with lower interest rates and perhaps waive late fees and over-limit fees when you're on a debt management plan, you are expected to refrain from opening any new credit accounts during that time. Should your financial circumstances change and you need or want to access credit for, say, a car loan, some lenders may view the credit counseling notation on your credit report negatively.

After you have completed your debt management plan, you will have established a steady payment pattern and your credit should be in good shape. Not only that, you will have paid off all your credit card debt and hopefully learned how to avoid accumulating more debt in the future.

Let's keep talking!

See related: Debt pay-off choices: Less now or a lot later, Debt management plans and your credit score