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Either yourself or with help, break the debt cycle

Susan Keating

Dear Credit Smart,
I’d like to compare a debt management plan that uses a third party, against closing accounts myself and making payments arrangements myself. What are the credit impacts? I am behind on two large-balance credit cards. Each has a very large payment due because of added multiple late charges. I am unable to pay the full amount of the minimum. I make a payment for less than the minimum, ergo, another late charge and interest on the previous late charge.

I need to stop the escalation, and break out of this cycle of late payments leading to more charges leading to more late payments. ...

My options as I see it: Call the original creditor, close the account and make payments on the closed account or consolidate with another company for a lower fee. Which, if any, would be worse credit-wise? – Erin

Dear Erin,
Once you fall behind on your credit card payments, it often seems an insurmountable task to catch up, which is the point you appear to have reached. You're in a cycle in which debt keeps piling up, and you have to break it.

I can tell that you have been weighing your options, both of which have their merits as well as some downside.

Since you are concerned about your credit, I want you to know that both options you mention are likely to have the same impact on your credit score since you say you will be closing the accounts. When you close an account you lose any available credit on the cards, and your amount of available credit is one of the factors that make up your overall score.

However, because you have already fallen behind and have been incurring late charges, my guess is that some damage has already been done and the hit from closing the accounts will be negligible. Making regular payments on some kind of plan, either through your creditor or a third party, will help to bring your score back up in time.

I believe that either option might work for you, and you should explore both. You always have the right to negotiate with your creditors on your own behalf, and, depending on what your relationship has been, this may prove to be the path you choose. But my suggestion is to call both creditors to find out what each is willing to offer you in terms of interest rate reductions and program length.

Accounts enrolled  in a debt management plan through a third-party nonprofit credit counselor are generally for a term of three to five years. Your late fees should cease once you are on the program and your accounts may be re-aged (brought current), depending on the creditor. Your counselor will be able to give you a fairly good idea of what your interest rates and payments will be, and once you have that information you can call your creditors. Let them know what you learned from the credit counseling agency and see if they can match or beat their offer.

One thing to note when you call your creditors is that they may very well suggest that you contact a credit counselor for help with your accounts. The internal hardship programs that your creditors may be able to offer you may only be short-term and are not meant to pay off your balances. These programs are simply to help consumers who may be experiencing temporary difficulties.

I believe you are looking for a long-term solution, so that is what you need to communicate to your creditors when you call them. Some can and will help you with that, but working with a nonprofit credit counselor will. At that point, it will be your call which way to go.

Remember to always use your credit smarts.

See related: Credit score basics: The five factors of a credit score