Why getting debt help may hurt access to new credit
Debt plans won't show up on your report, but old debt problems will
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I've paid $25,000 in
credit card debt down to $2,500 and would like to get a credit card again. I've
been turned down three times in the past year because people see I'm working
with Consumer Credit Counseling to pay that debt off. I'll be done in July
2012. When will that not be a negative factor preventing me from getting a new card?
Thank you! -- Sheila
Repaying that much money
is an achievement worthy of a sash and crown! And a new credit account, too.
Here's what's going on and how you can get the account you want.
First, we must revisit
the past -- the time before you began working with Consumer Credit Counseling
Service (CCCS). For untold reasons, you got yourself into quite a bit of ugly
debt and then had a hard time getting out of it on your own. Maybe you had missed
payments or those you did send were so small that the balances refused to
budge. So you turned to CCCS for assistance. After they developed a budget and
presented you with various options on how to deal with your financial problems,
you accepted their debt management plan (DMP) offer.
Debt management plans are designed to get
clients out of debt in three to five years. Part of the agreement you signed
was that while you are on the plan you don't pursue any more loans or lines of
credit. In fact, it's one of the primary reasons creditors who work with CCCS
reduce their interest rates for those on a DMP.
Some -- if not all -- of
those creditors have been reporting your participation on the plan to the
credit reporting bureaus. It's simply a note that says you're paying through a
third party system. This notice has no effect on your FICO score, but anyone
who pulls your reports can see it and make a subjective determination about
you. Their opinion may be good, bad or neutral.
Did the credit card
companies deny you because of the debt management plan? It's possible. Most will see that you've
been making your monthly payments on time and have deleted a significant amount
of debt, so will perceive that as fantastic. However, maybe when you applied
you still owed too much for their taste. Or your income wasn't sufficient.
Credit issuers look at more than just reports and scores; they assess your
overall financial circumstances. You've got to earn enough money to support the
card in question.
Another reason for the
rejections might be that your credit score was too low for the credit product you
pursued. Prior to going on the plan, you might have had an extremely low score
and though you've been improving your pattern with the main scoring factors --
payment history and outstanding debt -- you haven't actively been using credit.
Because of that, you haven't been adding positive charging action to your file.
What you have done is add a few inquiries though, which lowered your score a
So this is what you need
- Finish the plan. You'll free up cash that had
been going to your old creditors and new issuers will like that.
- Check your credit reports (AnnualCreditReport.com)
and score (myFICO.com). It's important to see where you stand today.
- Secure your income. If you don't have a steady
job, credit card companies won't want to do business with you.
- Apply for the right account type. Use the CardMatch
program on CreditCards.com to find the credit card that you will probably
When you have the card,
charge a few times a month and pay the balance in full. This way you'll remain
in the black and build a gorgeous new credit history. Long may Miss Credit
See related: 6 tips for finding the right debt management plan for you, Do debt management plans hurt your credit score?
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: May 23, 2012
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