Will a Debt Management Plan Hurt My Credit?

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 for DMP clients rise by around 60 points in the first two years.

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.

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  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.