Can I Get New Credit on a Debt Management Program?
After making regular payments for several months and seeing your debt balances decline, you may be tempted to open a new credit card account while enrolled in a debt management program. But is it a good idea?
Should I Open New Credit on a Debt Management Program?
In short, no. It’s not a good idea, especially if you want to get out of debt. Remember, opening new cards for promotional interest rates, discounts, or because you didn’t have the money to pay for things is exactly how you ended up in credit card debt.
A debt management program is designed to help you get out of debt as fast as possible with affordable monthly payments. Running up new debt defeats the purpose.
Will I Be Approved for New Credit While I’m on a Debt Management Plan?
A creditor considering you for new credit will review your credit report, credit score, and income to assess your ability to pay.
Your debt management company will not communicate with credit bureaus about your participation in a debt management program. However, some of your enrolled creditors may provide this information to your credit report. Therefore, it is possible that you could be turned down for credit based on your participation in a debt management program.
Additionally, if you are approved for a debt management program, you likely have a high debt-to-income ratio, which could be another factor that disqualifies you from acquiring new credit card debt.
It is possible to be approved for new credit while participating in a debt management program. Don’t assume that approval means you can afford debt service on additional monies borrowed. If you do open new credit, be incredibly cautious about using it, and pay it off, on time each month.
Will Opening New Credit on A Debt Management Program Impact My Credit Score?
Opening new credit can have a positive and/or negative impact on your credit score, depending on how much new debt you incur and your payment history. If you use a small percentage of your available credit (less than 30%) and pay on time every month, new credit can improve your credit score. If you use a large percentage of your available credit and miss payments, new credit can harm your credit score.
DMP Rule of Thumb: Keep One Card Open for Emergencies
Credit counselors suggest you keep one credit card account open for emergency use, but that’s it. Only one. Only for emergencies.
Nessa Feddis, Deputy Chief Counsel for Consumer Protection and Payment for the American Banking Association, said that while you might think you need an extra credit card, it’s probably a better idea to plan to get along without one.
“When you don’t have a card, it helps make it a little easier to solve whatever budget stress you’re under,” Feddis said. “The banks are giving you some concessions on interest rates and those concessions may be conditioned on giving up the card. Not having the card should be a positive. It helps the customer avoid temptation and look for other solutions.”
Alternatives to Credit Cards
Of course, there are other ways to buy things. For now, you want to make sure that every dollar spent comes straight from your bank account. The best way to do this is to use cash, checks, or debit cards to pay for everything. Your budget will shrink because you can only afford what you have in your bank account.
Charge cards and secured credit cards are alternatives. A charge card will require you to pay the balance in full each month, while a secured credit card is a line of credit backed by a bank account. The limit for a secured credit card is whatever balance you have in the account. These cards are not recommended, but if you must use credit, they are the safest option.
Whatever your method, be sure to finish out your plan before taking on another credit card. You’ll sleep a lot better when you’ve eliminated all your debt.
Sources:
- Value Penguin (2016) 38.1% of American households report having credit card debt. Retrieved from https://www.valuepenguin.com/average-credit-card-debt
- Johnson, H (2015, June 3) 65% of college students carry a balance each month. Retrieved from http://www.thesimpledollar.com/the-state-of-american-credit-card-debt-in-2015/