How a Debt Management Plan Affects Your Credit

It’s been well-known for years now that participation in a Debt Management Plan (DMP) doesn’t have any impact on your credit score. Of course, the full picture is more complicated than that.

Just signing up for a Debt Management Plan is not something FICO takes into account when calculating scores. They’ve determined that consumers shouldn’t be penalized for trying to repay their debts with the help of a debt management plan.

However, there are impacts to your credit that don’t affect your score. While on a Debt Management Plan, a client’s credit report will have a notation that he or she is currently enrolled in a Debt Management Plan. While that notation is active, they will not be granted new credit. Plainly, this is an impact to one’s credit that should be considered. But the notation goes away when the Debt Management Plan is complete, and doesn’t have a lasting impact on one’s credit.

There are other aspects of a Debt Management Plan that may impact one’s score, though. When a debtor enrolls in a debt management plan, all of his/her accounts are closed. This changes the mix of credit available to a consumer, and affects the length of one’s credit history. Those changes to the utilization rate and age of accounts can lower one’s score.

Other Aspects of a Debt Management Plan

On the flip side, the Debt Management Plan is designed to be paid off with regular monthly payments over approximately four years (our clients use an automated payment system so their consolidated debt payments are transferred electronically). These timely payments over the course of years have a very positive impact on the client’s payment history, which is the largest factor in calculating one’s FICO score. (That also means, of course, that if a client is late with their Debt Management Plan payments, there will be significant negative impact on his/her score.)

So it’s impossible to predict what a client’s true credit score impact will be:

  • 35% of one’s score is payment history, which will be positively affected as long as DMP payments are made on time every month.
  • 30% of the score is based on amounts owed, which will be positively impacted as the balances are paid down.
  • 15% of the score is length of credit history, which will suffer under a DMP, since accounts must be closed when enrolled.
  • 10% of credit score is based on inquiries for new credit, which the client will not have while on a DMP (leading to a positive impact to the score).
  • The final 10% of a credit score is one’s credit mix, and that is unique to each individual, so it’s hard to say what a DMP will do in general terms.

So the bottom line is, enrollment in a debt management plan doesn’t affect one’s credit score, but certain facets of a Debt Management Plan—timely payments, closing accounts, smaller amounts owed, utilization rate changes, etc.—may impact one’s score in both negative and positive ways.

Ultimately, clients who graduate from our Debt Management Plan tend to have little trouble securing new credit and loans, suggesting that credit impacts for most clients are not negative.