How Will a Debt Management Plan Affect Your Credit Score?

Part of the reason you use a debt management plan (DMP) to overcome credit card debt over other solutions is that it minimizes credit damage. Unlike debt settlement or bankruptcy, using this type of program won’t create negative remarks in your credit report. However it does influence your credit score and that influence can be good or bad, depending on where you started. This guide explains why.

Some debt solutions are noted in your credit report. Bankruptcy creates a public record that sticks around for 7-10 years. Debts settled through a debt settlement program are noted as “settled in full,” which is also noted for 7 years.

Debt management doesn’t have any negative notation. As long as the program is set up correctly and you make the payments on time, there will be no negative remarks on your credit report.

Debts paid through a debt management plan will be noted as “paid in full,” which is what you want.

Why a DMP’s credit score impact can be positive or negative

There are five factors used to calculate credit scores, including FICO and VantageScore. Each factor has a different “weight” for how much in impacts your final score.

• Account history 35%
• Credit utilization 30%
• Credit age 15%
• New applications 10%
• Credit mix 10%

A debt management plan has positive effects on some factors, particularly the biggest factor. The program helps you build a positive payment history on each account you include.

At the same time, the program has some negative effects on other factors, but mostly minor ones. The biggest negative impact comes from having to close your accounts. However, since the factors that effects don’t carry as much weight, the negatives can often be outweighed by the positives.

If your score is low when you start a debt management plan, the program will usually have a positive impact.

On the other hand, if your score is extremely high when you start the program, then you may see your score drop slightly when you complete the program. In this case, you may want to consider other options, such as a debt consolidation loan.

How debt management affects the 5 scoring factors

Tips for maintaining your score through a DMP

• If possible, make your minimum payments until your program officially starts. While the credit counseling agency is talking to your creditors, you’ll need to continue making payments to avoid missed payments before your first plan payment.
• Choose a reputable credit counseling agency. Once your payments start, it will be up to the credit counseling agency to distribute the money on time. Only work with a reputable, well-rated agency to avoid getting popped for a bad agency’s mistake.
• If you keep a card out, make sure it’s an old account in good standing with a low balance. Because credit age is a factor to good credit, this will make it easier to maintain your score as you complete the program.
• Don’t go crazy with credit applications once you finish. Space new credit applications out by at least six months.
• If you decide to quit credit cards for good, find other ways to build credit. You don’t need credit cards to achieve better credit. In fact, some loans were designed for building credit.