Does a Debt Management Plan Affect Credit? (2024)

If debt keeps you up at night, you’re far from alone. It’s a suffocating weight that can take the joy out of everything you do.

If you can’t see a way of escape, a debt management plan, or DMP, could be for you. Created by working with a debt counselor, DMPs are based on agreements negotiated with your creditors to potentially lower interest rates and bring your delinquent accounts current. They’ll even roll the debts in your plan into a single monthly payment, which can make things much more manageable. Plans generally entail a three-to-five-year program, in which you make payments to the agency and it forwards them to the creditors.

DMPs are different from debt relief plans. One of the primary differences is that you don’t have to stop payments on your loans for DMPs to kick in. They are one of a variety of options to settle debt—up to, and including, bankruptcy.

Let’s take a look at the good and the bad that comes with a DMP to help you decide if it’s right for your situation.

Debt management plan: Pros & cons


Professional help

Select credit cards will be closed

Lower monthly payment

You’ll pay fees

Lower interest rate

Doesn’t cover all debts

Debt collectors stop calling

The majority of participants don’t complete the program

The benefits of a debt management plan

Lower monthly payment

Many people considering a DMP are swimming in credit card debt. If that’s your situation, making minimum payments across multiple credit cards may be the only thing you can afford at the moment. And doing that—even if you can swing it—can put you further behind as the interest payments add to your original debt.

The obligation to make multiple minimum payments each month can amount to hundreds of dollars, perhaps even more than $1,000. This makes it difficult to eliminate one credit card bill at a time to decrease the number of minimum payments you’re making.

A DMP can solve this problem. All your credit card bills (or other unsecured debt) will be rolled into a single bill each month, which could result in you paying a fraction of your credit cards’ monthly minimum payments. This can free up more money to pay off the principal.

Lower interest rate

The monthly interest fees that are rolled into your minimum payment are often severe. A DMP can result in lower interest rates.

Rewards credit cards routinely charge an APR of 25% or more—effectively imprisoning your finances for many years if you dig yourself into a hole of debt. With rates that high, your monthly minimum payments are largely interest. Debt management counselors can negotiate a lower interest rate for you, meaning you’ll see a big difference in the velocity of your debt reduction.

Professional help

To create a DMP, you’ll work with a counselor, who will audit your finances and help you decide the most beneficial plan of attack. They can even request waived account fees with your lender.

The U.S. Dept. of Justice has a state-by-state list of approved credit counseling agencies that can help you find one. Local or state consumer groups may also be able to help. Be sure to use a recognized nonprofit agency and research it before signing up. There are credit-counseling scams.

The counselor will look at the size of your debt and assess your income. There’s no need to feel vulnerable or embarrassed about these details as you are in a judgment-free environment. Talking things out with a professional can be very cathartic and educational. They’ve seen it all, and they’ll have answers to any questions you might have.

In fact, the counselor may suggest that you not initiate a DMP. If they can find another feasible path out of debt, they’ll tell you.

Debt collectors stop calling

If your credit cards have been handed over to collections, you’ve probably experienced a nauseating amount of phone calls. Voicemails hounding you for money is one of the most stressful aspects of debt..

When you enter into a DMP that includes credit cards that have been sent to collections, the phone calls should eventually stop. Debt collectors will be notified that you’ve created a plan to pay back your balances.

The disadvantages of a debt management plan

Select accounts will be closed

DMPs can help you pay down your unsecured debt considerably faster. The tradeoff is that you’ll have to close those accounts.

For example, any credit cards you choose to include in the DMP will be closed. You won’t be able to use those credit lines anymore. For this reason, it could be wise to not include all your credit cards—even if they’ve all got debt. Perhaps keep one open and use the money you’re saving on your other debt to pay down your one open card. That way you’ll at least have access to one credit line. Of course, this strategy is only worth pursuing if you still feel comfortable having a credit card and commit yourself to using it wisely.

You’ll pay fees

Though credit counseling agencies are usually nonprofit, that doesn’t mean they’re free. The initial counseling session you’ll receive might be free, but there are startup fees for entering into a DMP (usually less than $50) and monthly fees (usually less than $75). If you are paying a lot of interest, which basically amounts to setting your money on fire, the price tag of a DMP could easily be justified.

Not all debts are covered

DMPs are most commonly for unsecured debt, such as credit cards and personal loans. In other words, they’re not for mortgages, auto loans, and other debt backed by collateral. If you’re feeling overwhelmed with secured debt, a DMP isn’t a viable option—though you are still welcome to set up a meeting with a debt management counselor for advice. They also don’t work for student loan debt or unpaid taxes, both of which have separate mechanisms for settling debts.

The majority of people don’t complete the program

According to, some 55% to 70% of people who begin a debt management program don’t complete it. The programs generally take three to five years—a very long time. People in programs with higher interest rates were more likely to fail to finish.

How does a debt management plan affect credit?

Credit history will decrease

As soon as you enter into a DMP, all the accounts you’ve requested help with will close.And any time you close a credit account, it will adversely affect your credit history, which accounts for 15% of your overall credit score.

For example, you can use a DMP to roll the debt you’ve amassed on five credit cards. But when you do that, those five credit cards will be closed, potentially lowering your average credit account age by many years.

This isn’t the end of the world, though. A DMP could still be a no-brainer for people with considerable debt.

Credit utilization can increase

Similarly, when your credit cards are closed after being rolled into a DMP, the credit lines you lose can contribute to an increase in credit utilization.

Credit utilization is the ratio of the amount of credit you’re using compared to the amount of available credit you have. If you choose to keep a credit card or two open and close the rest, the percentage of credit you’re using may be much higher. This is a big deal because credit utilization accounts for 30% of your overall credit score.

Still, that shouldn’t put you off the idea of a DMP. You can rebuild your credit later—the priority is that you get out of debt.

You’ll make on-time payments

If you’re currently allowing credit card bills to go unpaid because you can’t afford even the minimum monthly payment, a DMP will revolutionize your credit for the better.

Not only will you have a much easier time making on-time payments via a DMP, but your creditors may “re-age” your delinquent accounts to make them current. All these accounts will be recorded as on-time payments as long as you make your DMP payment on time.Payment history accounts for 35% of your credit score. Creditors care more about this than anything else, so it’s critical that you do whatever it takes to make on-time payments.

To ensure you never miss a payment due date, you can set up automatic payments with your bank account or with an alternate account like Cash App, which has the ability to send payments to lenders on specified dates.

What you can do before starting a debt management plan

There are several things to try before you commit to a DMP.

Balance transfer

Balance transfers are the act of moving debt from one account to another account. It sounds nonsensical, but it can actually be a boon.

For example, if you’ve got debt on a high-interest credit card, you can open a credit card that offers 0% intro APR on balance transfers. Just note that if your credit score is already in the basem*nt because of your high credit utilization and/or missed payment history, you may not get approved for a new credit card. And if you do get approved, you may receive a paltry credit line that’s not enough for you to transfer a meaningful amount of that high-interest debt.

Personal loan

When you take out a personal loan from a bank, you can use it for literally anything you want. If your finance margins are razor-thin and you need some breathing room, a personal loan could be the way to go. A lump sum of money can help you to guarantee you’ll have the funds for many future months of minimum payments. Alternatively, you can use that money to zero out some of your credit cards (we’ll talk about this option a little more below).

Again, you may not be approved for a personal loan if your credit score is poor as a result of your current debt. You should shop for the best personal loan rates and see which companies will match your financial needs.

Manage expenses with debt reduction tools

There are a handful of powerful apps that can help you keep track of your finances and push you toward your payoff goals. They are often visual and convey action steps in a digestible way to keep you motivated.

For example, Quicken offers a tool that helps you to craft a debt reduction plan. Quicken will scan your profile for accounts with balances and present them to you with two options: accounts to include in your plan and other debt accounts. You’ll also be able to see the interest rates and minimum payments for each account. If you’ve got debts that are low-priority (say, an account that has a low APR), you don’t have to add them to your plan. You can instead focus on the accounts that are sucking the life out of your bank account.

Another option is Monarch Money, an app that helps with your budget. It employs the zero-based budgeting system, which demands that you input exactly where every penny of your income goes each month. This holds you accountable for all your spending to help you uncover seemingly innocuous purchases that might be making a big dent in your finances.

RELATED: Mint Alternative Apps

How to get started with a debt management plan

Decide how you’d like to interact

You’ll have the option to talk through a DMP either in-person, by phone, or online. The medium may not normally be a big issue for most, but it’s worth mentioning because of the potentially uncomfortable nature of the meeting.

Locate a credit counselor

When looking for a credit counselor, most folks will want to stick with nonprofit organizations. Agencies within the National Foundation for Credit Counseling or the Financial Counseling Association of America are good places to begin.

Study your credit report

You’re going to want to enter this meeting prepared with the knowledge of your situation. Examine your credit report, utilize debt management apps, and view your individual accounts to help give your counselor everything they need to provide an informed decision.

Alternatives to a DMP

Talk to your creditors

Credit counselors do an excellent job at contacting your lenders to ask for lower rates and waived fees. However, you can actually do this yourself by calling the customer service number on the back of your credit card. By explaining your current situation of financial hardship (and ideally bolstering your credibility with a lengthy history of on-time payments), you might be surprised at how willing a lender is to lower your interest rates, if only temporarily.

Debt consolidation

A debt consolidation loan is a type of personal loan that, instead of simply handing you a giant check, commonly pays your debts directly. You’re then indebted to the lender that extended you the debt consolidation loan. This can drastically lower both your interest rates and your monthly payment. The problem is that with poor credit, it’s difficult to be approved.

Debt settlement

Debt settlement programs can act as a negotiator between you and your lenders. You may end up paying significantly less than your current balances as the debt settlement company irons out a deal with your creditors.

The downside is that you’ll miss payments on your credit cards as the deal is being worked out. Some debt settlement agencies will instruct you to stop paying your bills and allow your accounts to become several months past due. This will wreck your credit score.


Bankruptcy is a last resort, but it’s still not the dagger to your credit that you might think. Yes, your credit score will plummet big time (potentially by hundreds of points) but that blemish will completely disappear from your credit report in seven to 10 years as though it never happened. You could also see your credit score improving in less than a year after filing.

Bankruptcy is admitting that you simply cannot see a way out of your debt for the foreseeable future. You may need to sell assets to pay your lenders and some forms of debt, like student loans, won’t be forgiven. However, bankruptcy can prevent your house from foreclosing, and stop debt collectors from taking you to court.

TIME Stamp: DMPs can help you shed debt with minimal impact on your credit score.

A DMP is one of the least painful ways to climb out from under the thumb of crippling credit card balances and other unsecured loans. You’ll receive guidance from a credit counselor, who will help you decide the easiest way to clear your debts. That may include canceling several credit cards, but it’s worth it. Just be sure that you are able to make it to the end of the payment period;

Frequently asked questions (FAQs)

What is the fastest way to reduce debt?

Technically, the fastest way to reduce debt is to file for bankruptcy. This forgives most of your unsecured debts, but its severe consequences make it a last resort.

For most people, the fastest way to reduce debt is to drastically lower your cost of living and put as much of your income as possible toward paying off that debt. This could mean moving to a less expensive home, selling a car, and making stringent meal plans until you’ve got a better handle on things. And don’t rule out a temporary second job.

How can I manage debt myself?

Managing debt comes down to making a budget. You must be able to account for every dollar you make to ensure you’re not wasteful with your finances. You can also ask your lenders for a lower interest rate while you endeavor to pay back the money you’ve borrowed.

What are the 3 methods of debt management?

The three most popular debt management methods are:

  1. Debt snowball. This is the practice of making the minimum payment on all your accounts and putting the rest of your money toward the account with the smallest amount of debt. As you pay off your lowest balances one by one, you’ll lower the number of monthly payments you need to make. And you get the psychological pleasure of eliminating the number of accounts on which you owe money.
  2. Debt avalanche. You’ll still make minimum payments on all accounts, but you’ll focus on the loan with the highest interest rate first. This helps you eliminate the most detrimental balances first and saves money on interest.
  3. Debt consolidation. By rolling your current debts into one new loan, you’ll almost certainly slash both your interest and your minimum monthly payment. The dangers are the time it takes to repay the loan—and the risk that zero balances on your paid-off credit cards will encourage you to run up more credit card debt.

The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.

Does a Debt Management Plan Affect Credit? (2024)


What are the disadvantages of a debt management plan? ›

Disadvantages of a debt management plan include:
  • your debts must be repaid in full – they will not be written off.
  • creditors don't have to enter into a debt management plan and may still contact you asking for immediate repayment.
  • mortgages and other 'secured' debts are not covered by a debt management plan.

How long does a debt management plan affect your credit rating? ›

The accounts you are repaying your DMP through will already be listed on your credit report, and once the DMP is complete the marker will be removed and the accounts themselves will be marked as closed – they will then remain listed for six years from the settled date.

Do debt management plans hurt your credit score? ›

Although enrollment in a debt management plan doesn't directly impact one's credit score, various aspects of the program — such as timely payments, account closures, reduction in amounts owed, and changes in credit utilization rates — might influence the score in both negative and positive ways.

How long does it take to rebuild credit after a debt management plan? ›

Debt settlement will remain on your credit report for seven years. This means that for those seven years, your settled accounts will affect your creditworthiness. Lenders usually look at your recent payment history.

Can I still get credit on a DMP? ›

If your DMP involves you making repayments less than the amount originally agreed with lenders, then it will affect your credit score. This means you could find it harder to get credit while making reduced payments.

Can I get a loan while on a DMP? ›

A debt management plan affects your credit file. Most mainstream banks and lenders will be reluctant to lend to you once they see your credit file and they know you are on a debt management plan. The plan works by you making reduced payments, so defaults will appear on your credit file.

Which debts can t you pay off with a debt management plan? ›

DMPs generally don't include secured loans, like mortgages and auto loans, and some types of unsecured loans, such as student loans. Counselors may be able to offer guidance on how best to repay these debts, but you'll generally need to manage the payments on your own.

What happens if I pay off my DMP early? ›

You'll also want to notify your creditors of your decision so you can discuss the path forward. Pay off your debts. There's generally no penalty for making extra payments on your DMP, and if you can afford to pay off all of your balances at once, that'll end your agreement early. Stop making payments.

Will a debt management plan affect me getting a mortgage? ›

As credit scores are usually the first thing a lender will look at when deciding whether or not to lend you money, it means that entering into a DMP in order to repay your debts might make it harder for you to get a mortgage.

Is a DMP worth it? ›

A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.

Do I have to include all debts in a DMP? ›

Include all of your debts.

Make sure all of your debts are included in the DMP, even if you think you can manage that catalogue payment or want to keep your overdraft 'for emergencies'. Sometimes you might have missed a debt from your plan, so be sure to let your DMP provider know about any changes as soon as possible.

What happens when you finish a DMP? ›

Your credit history starts to look better after your DMP. Information like missed payments or court action is removed after six years. If an account has defaulted, the debt is removed six years after the default.

Can I buy a house after debt settlement? ›

How Long After a Debt Settlement Can You Buy a House? There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).

What happens after 6 years on a debt management plan? ›

After 6 years, the negative information recorded on your credit file will start to disappear. However, this doesn't mean you're automatically debt-free or that your credit score will immediately improve. It's important to continue making your DMP payments and practicing good financial management.

Will a debt management plan affect my bank account? ›

While a DMP does not directly affect your bank account, it can lead to changes in your monthly payments. When you enter a Debt Management Plan, your monthly repayments are often reduced. This means that the amount of money going out of your bank account each month may decrease, leaving you with more disposable income.

What are two of the signs of trouble in debt management? ›

Here are a few warning signs that may be telling you that your debt is about to be more than you can handle:
  • You have no savings. ...
  • Your bills are stressing you out. ...
  • Money is always on your mind. ...
  • You're hiding purchases. ...
  • You're only making the minimum payments. ...
  • You use one debt to pay another. ...
  • Your card is declined.
Apr 7, 2024

What debts Cannot be included in a debt management plan? ›

Debts that cannot be included in a debt management plan (DMP) are those that are considered 'priority debts' such as mortgages and secured loans, student loans, court fines, and child support payments.

What happens at the end of a DMP? ›

Some of these debts may already have disappeared from your credit file when you finish your DMP. Debts which were marked as having a payment arrangement will disappear six years after you make your final payment and settle the account. This is usually six years after you finish your DMP.

What are the pros and cons of a DMP? ›

Pros and Cons of Using a Debt Management Plan
  • You only need to make one monthly payment. ...
  • You may be able to secure lower interest rates. ...
  • You'll likely save a lot of money. ...
  • You Should See Your Credit Score Increase Over Time. ...
  • You are required to close your credit card accounts.


Top Articles
Latest Posts
Article information

Author: Arline Emard IV

Last Updated:

Views: 6169

Rating: 4.1 / 5 (72 voted)

Reviews: 87% of readers found this page helpful

Author information

Name: Arline Emard IV

Birthday: 1996-07-10

Address: 8912 Hintz Shore, West Louie, AZ 69363-0747

Phone: +13454700762376

Job: Administration Technician

Hobby: Paintball, Horseback riding, Cycling, Running, Macrame, Playing musical instruments, Soapmaking

Introduction: My name is Arline Emard IV, I am a cheerful, gorgeous, colorful, joyous, excited, super, inquisitive person who loves writing and wants to share my knowledge and understanding with you.