Payday Loans Debt Consolidation

Do The Services Of Payday Loan Debt Management Companies Hurt Your Credit?

Not necessarily, but the answer to this question depends mainly on how effectively payday loan debt management companies negotiate with your lenders. Whether their services are going to hurt your credit or improve your FICO score will depend mainly on the debt payments you are making as part of the management program are being reported to the credit bureaus by your lenders. In order to have an in-depth understanding in this regard, you must first learn about the five major factors that are taken into consideration by the three major credit bureaus (TransUnion, Equifax and Experian) to determine your FICO score.

Factors That Affect Your Credit

Payday loan debt management companies are well aware of the five major factors that affect your credit and they usually design their program accordingly. The five major factors that are taken into consideration to determine your credit score include monthly payments toward debts and bills (35%), outstanding debt balance (30%), debt to credit ratio (15%), types of credit (10%), and enquiries for new loans and credit (10%). The last two factors have nothing to do with a payday debt management program, but it can affect the first three factors.

Payment Toward Debts

When payday loan debt management companies try to manage and settle your debts by communicating with your lenders on your behalf, and when the lenders report to the credit bureaus that they are receiving payments from the borrower (you) as part of a debt management program, it adversely affects your credit. It shows that you have been financial irresponsible and that is the reason why you decided to get assistance from a payday debt management company. But, if the debt management contract has been designed in such a way that requires the lenders to report the payments to the credit bureaus as ‘paid in full’, it is going to give a significant boost to your credit score. When debt payments are made in full and in a timely manner, it shows that you are a financially responsible person and can be trusted by the lenders. Since debt payments contribute to 35% to your credit score, you can see significant improvement in your credit health within a matter of just a few months provided you do not make further defaults anymore.

Outstanding Debt Balance

Payday loan debt management companies usually design their programs in such a way that should allow you to pay off your debts faster but in an affordable manner. If you are lucky enough to find the right program, you can see further improvement in your credit score. Your score will rise as fast as the outstanding balance on your payday loan accounts reduces. So, another 30% of your credit score can be taken care of if you choose the right debt management program.

Debt To Credit Ratio

This is also commonly referred to as credit utilization ratio, which means the amount of debt you owe to different lenders against the maximum credit limit available for you. The standard rule is to keep this ratio to 30%-40%. Since payday loan debt management companies can help you reduce your debts faster, this factor can also be taken care of.

Overall, if you follow the right strategies and choose the best company to negotiate your debts with payday loan companies, signing up for a debt management program can actually help you improve your FICO score. You are advised not to enquire for new loans or credit until you pay off all your payday debts. This will take care of another 10% of your credit score and you will be able to see faster improvement in your credit situation.


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