Will a Debt Management Plan Hurt My Credit? (2024)

If your debt feels like a burden, it might be a good idea to consider a debt management plan(DMP). Debt management plans aren’t a silver bullet—you still pay your debt—but the benefits and structure of a DMP might be exactly what you need.

Here’s how it works: with a DMP you make one monthly payment to a credit counseling agency and then they pay the bills on your behalf. Plus, credit counselors from the agency will negotiate with lenders to secure lower interest rates and reasonable monthly payments. If you’re committed to debt freedom, then a debt management plan might be a great option.

Read more: How a Debt Management Plan Works

But there’s probably another question on your mind as well: Will a debt management plan hurt my credit?

Here’s everything you need to know about debt management plans and credit scores.

How it’s reported on your credit score

A debt management plan is different from debt settlement or debt consolidation. Because of that, it appears differently on your credit report. Creditors might report that your account is in financial counseling and they may continue to report your monthly payments. However, none of that will reflect poorly on your credit score.

Read more: How Long Does a Debt Management Plan Stay on Your Credit Report?

With a DMP, you will eventually pay your debt in full, and ultimately, that is what your credit file will show. The fact that you used a credit counseling agency to do so will not reflect negatively on your credit score.

There might be an initial dip

In exchange for the perks associated with your debt management plan (lower interest rates and reasonable monthly payments), you will be asked to close your accounts.This is to ensure that you utilize the perks for the intended purpose, but closing your accounts might affect your credit score.

Your credit score is based on a variety of factors. One factor is your credit utilization ratio, which is the amount of credit you have access to versus the amount you have in use.

Read more: How to Calculate Your Credit Utilization Ratio

In general, a lower utilization ratio equals a higher credit score. But when you close accounts, your ratio might increase because you will have less access to credit.

This might cause your score to decrease. However, the dip in your credit score is usually temporary. You can typically expect your credit score to rise as your debt decreases. In fact, on average we see credit scores rise by around 84 points for clients who successfully complete their DMP.

The rules still apply

Even though debt management plans have some unique rules—like making one monthly payment to a credit counseling agency—the typical rules about how to maintain a good credit score still apply.

In order to maintain or even increase your credit score, it might be a good idea to do the following.

Make payments on time

Even though you only have to make one monthly payment, it’s still important to make it on time. This ensures that the credit counseling agency can make on-time payments on your behalf.

Check your credit score

It’s always a good idea to check your credit report at least once per year. You can access it for free through Annual Credit Report. This is a great way to check for errors and ensure that your payments are reported correctly.

Avoid new debt

The goal of a debt management is simple: pay off debt. Not only would new debt defeat the purpose of the DMP, but it might also negatively affect your credit. Remember, credit ratio utilization is one of the factors used to determine your score.

Focus on the big picture

Even though there might be a temporary decrease in your score at the beginning of your debt management plan, it’s important to focus on the big picture. You can usually expect your credit score to rise as debt decreases.

Will a Debt Management Plan Hurt My Credit? (2024)

FAQs

Will a Debt Management Plan Hurt My Credit? ›

The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.

What are the negatives of a debt management plan? ›

What Are the Disadvantages of a Debt Management Plan?
  • Certain Debts Are Ineligible. DMPs generally don't include secured loans, like mortgages and auto loans, and some types of unsecured loans, such as student loans. ...
  • You'll Pay Fees to the Credit Counseling Agency. ...
  • Limited Access to Credit.
Sep 13, 2023

Does a debt management plan show up on your credit report? ›

A DMP means you'll repay your debts more slowly, so your score may be negatively impacted for longer. Note that your DMP will not be recorded as a separate entry on your report. However, creditors should add a DMP 'flag' to your account entries.

Is it worth doing a debt management plan? ›

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.

What happens to your credit when you use a debt relief program? ›

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.

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

DMPs don't include priority debts. These are debts that have been secured against your home and other assets, as well as utility bills or Council Tax. You'll need to prioritise payments to these in your budget. These must be paid in accordance with the original agreement.

Do you lose your credit cards after debt consolidation? ›

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

What happens after 6 years on a DMP? ›

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.

Can you get a credit card while on a DMP? ›

While on a debt management plan (DMP), you are technically free to take out a new credit card – though you may find it harder to be approved for one.

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

The deposit you will need, however, to pay to qualify for a mortgage will be affected by your debt management plan. Both in terms of the specifics of the plan itself and when it was (or will be) completed, you can expect very different deposit requirements.

Can I keep my bank account on a DMP? ›

Your Bank Account & A Debt Management Plan

In conclusion, a Debt Management Plan (DMP) does not directly affect your bank account. You can usually continue using your current bank account as usual when you enter a DMP providing that you do not wish to include a debt on your DMP that is with your bank account provider.

Can I get a loan while on a debt management plan? ›

Yes, getting a loan is possible to be obtained whilst on a debt management plan. However, it is always worth considering is it necessary whilst on reduced monthly payments to your other debts. Obtaining further credit puts more strain on your financial commitments, and could leave you short with other living costs.

What are the disadvantages of a debt relief program? ›

Disadvantages of Debt Settlement
  • Debt Settlement Fees. Many debt settlement providers charge high fees, sometimes $500-$3,000, or more. ...
  • Debt Settlement Impact on Credit Score. ...
  • Holding Funds. ...
  • Debt Settlement Tax Implications. ...
  • Creditors Could Refuse to Negotiate Your Debt. ...
  • You May End Up with More Debt Than You Started.

What debt relief doesn t ruin your credit score? ›

These methods won't crush your credit score: Consolidation loans from a bank, credit union, or online debt consolidation lender. Balance transfer(s) to a new low- or zero-rate credit card. Borrowing from a qualified retirement account, such as an IRA or 401(k).

Is there really a debt relief program from the government? ›

Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.

Is it a good idea to use a debt relief program? ›

If you're one of the millions of Americans struggling to repay high-interest debt, a debt relief plan may be an option to help you get your finances on track. But it's not a quick fix. It's a long-term solution designed to help you get out of debt over a period of time — typically several years.

What is the downside of using a debt relief program? ›

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.

Does a debt management plan hurt your credit? ›

The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.

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

What Are the Warning Signs of a Debt Problem
  • Sign #1: Mounting Credit Card Balances. ...
  • Sign #2: Difficulty Making Minimum Payments. ...
  • Sign #3: Persistent Overdrafts or Bounced Checks. ...
  • Sign #4: Ignoring Bills or Avoiding Calls from Creditors. ...
  • Sign #5: Using Savings to Cover Expenses. ...
  • Sign #6: Stress & Anxiety About Finances.
Apr 9, 2024

What is the average interest rate on a debt management plan? ›

Every participating creditor offers their own rates, but in aggregate, the average interest rate for accounts included on a debt management plan with MMI is below 8%.

References

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