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.
For consumers with unmanageable amounts of credit card debt, MMI offers free, confidential debt counseling and, when applicable, access to debt relief programs, including a debt repayment program called a debt management plan (DMP).
When considering your debt relief options, one factor 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:
Year-over-Year Data
MMI conducted a four-year analysis of credit score data and found that clients who started and maintained a DMP with MMI improved their credit scores by 82 points from start to finish on the program.
The study tracked the annual aggregate FICO® 9 Score migration over time for MMI clients who started and maintained a DMP for four years. DMPs beginning between 2016 and 2019 were included in the study.*
| Year | Score |
|---|---|
| Pre-DMP | 590 |
| One | 629 |
| Two | 651 |
| Three | 666 |
| Four | 672 |
*Individual outcomes will vary, and results are not guaranteed.
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 rebuilding 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. By making consistent, timely payments through a DMP, your payment history looks good and improves your credit score in the process.
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.
Because a DMP makes debt repayment faster and more affordable, it can be easier to improve this category and your credit with a DMP.
Length of Credit History: 15%
Accounts that have been open for a long time are better for your score than new accounts.
Closing accounts can lower your score
It’s important to keep in mind that accounts are closed when they are included on a debt management plan. If you include a number of older accounts on a DMP, your score is likely to drop in the short term as the average age of your accounts drops. If your credit is already poor, this probably isn’t a big concern.
The negative impact it could have on your report is minimal when compared to your long-term positive impact of paying off your debt. On average, DMP clients have seen their credit score improve by 62 points after two years.
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). Similar to length of credit history, your credit mix may cause your score to dip after starting a DMP as many (or all) of your credit card accounts are closed.
While your credit score may not be the most important thing in your life (especially if you're struggling), the more you focus on rebuilding credit and improving 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.
