How a Debt Management Plan Can Impact Your Credit Score
Most of the people who come to MMI are facing some kind of financial challenge. They may be behind on their mortgage, overwhelmed by student loan debt, or struggling to fund their retirement. The majority, however, are trying to manage more debt than their income can support.
When considering your debt repayment options, one consideration should be how that method impacts your credit score. To accurately determine how a DMP might impact your credit score, MMI reviewed multiple years worth of data. Here's what we found:
Significant Increase in Credit Score for DMP Clients
In order to understand the typical credit score impact that debt counseling and a debt management plan can have on consumers, we tracked anonymized credit score data for MMI clients. We found that clients who completed a one-time debt counseling session saw their credit scores improve by an average of 37 points over the following two years. Clients who started and maintained a DMP saw their credit scores improve by an average of 62 points over two years.
Our tracking began in 2017. Here's the average year-over-year improvement we saw:
Clients who participated in a debt and budget counseling session (but did not start a DMP)
- 2017 Score | 567
- 2018 Score | 590
- 2019 Score | 604
Clients who started and maintained a DMP with MMI
- 2017 Score | 592
- 2018 Score | 635
- 2019 Score | 654
How a DMP Impacts your Credit Score
A debt management plan can influence your credit score in multiple ways. Most importantly, a DMP is designed to help you do two things that are essential for building strong credit:
- Make consistent payments
- Reduce overall debt levels
While there are many different credit scoring models, nearly all weigh similar factors. Here are the most important factors in your FICO credit score:
Payment History: 35%
This includes the previous seven years of payments (including missed or late payments) for all credit and loan account.
Amount Owed: 30%
While this factor includes your total debt amount, the biggest factor may be your credit utilization ratio. If you use too much of your available credit, your score may suffer.
Length of Credit History: 15%
Accounts that have been open for a long time are better for your score than new accounts.
Recent Inquiries: 10%
Recent attempts to open new credit and loan accounts may decrease your score (at least temporarily).
Credit Mix: 10%
Having a mix of credit and loan products in good standing is better for your score than only having credit cards (for example).
While your credit score may not be the most important thing in your life (especially if you're struggling), the more you can do to improve your score while getting out of debt, the better – especially if you've got big purchases on the horizon, like a car or a house.