How a Debt Management Plan Affects Your Credit: Pros and Cons

A person on a debt management plan holding an envelop, pulling out a credit report.

Paying off large amounts of debt can be a daunting task. If you’ve recently fallen behind on payments, have more cards than you can manage, or have payments that are too high, rest assured – you’re not alone.

There are many debt relief options available for those looking for help to get out of debt fast. One of the most effective options is using a Debt Management Plan (DMP).

But do debt relief programs like Debt Management Plans hurt your credit? Before deciding which debt relief option is best for you, be sure to explore the following pros and cons of using a debt management program.

How Does Debt Relief Work?

Debt relief (or debt settlement) is a program offered by third-party debt relief companies to borrowers struggling to make debt payments. Typically, these companies encourage borrowers to use money meant for debt repayment for savings or for other bills and obligations.

While the borrower is saving, the company tries to negotiate with creditors for lower interest rates and monthly payments on the remaining amount owed. In theory, this creates a more manageable payment plan for the borrower and a full repayment for the lender.

However, these programs do not always go as planned. Many times debt relief companies are not able to negotiate a lower payment for all of your debts. This can have a drastic effect on both your credit and your financial security:

  • You may end up paying large fees to the third-party company
  • You may incur late fees on the debts you owe
  • You may burn bridges with future creditors
  • You may have to pay fees in a third-party bank account
  • You may have a debt collection lawsuit filed against you
  • You may have a negative impact on your credit score

How Do Debt Management Plans Work?

An alternative to a debt relief program is a Debt Management Plan (DMP). Credit counseling companies such as offer Debt Management Plans to borrowers who are struggling to make multiple or high monthly payments.

Unlike many third parties, works directly with every client to determine the best ways to handle every financial situation. If you qualify for a DMP, a debt counselor will negotiate with creditors on your behalf to help get you lower interest rates and monthly payments.

When you agree to take part in a debt management program, you also agree to close all of your current credit accounts. A notation is made on your credit history to indicate to lenders that you are on a DMP and cannot have any new lines of credit. This notation is removed once you complete or exit your DMP.

How Does a Debt Management Plan Affect Your Credit?

The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.

When you agree to close all of your credit accounts, your credit history stops. Lenders and credit agencies like FICO and VantageScore use your credit history to generate a credit score. A temporary pause in your available credit may have a negative effect on your score.

However, once you’ve left your DMP, the freeze on your credit is removed, and you can continue to apply for and use your credit. The notation signifying your DMP activity does not have a negative effect on your score going forward – in fact, it may suggest to lenders that you actively work to pay all of your debts to the best of your ability.

Additionally, DMPs are designed to be paid off with regular monthly payments over about 4 years. When you sign up for a DMP, your monthly payments are automatically taken out of your bank account every month. These timely payments over the years will have a very positive impact on your payment history.

Credit Score Breakdown

If you’re curious to see exactly how much of an effect a DMP has on your credit score, take a look at this general credit score breakdown:

  • 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, or credit utilization,  which will be positively impacted as the balances are paid down
  • 15% of the score is the length of credit history, which will suffer under a DMP when accounts are closed
  • 10% of credit score is based on inquiries for new credit, which the client will not have while on a DMP
  • 10% of a credit score is one’s credit mix, which is unique to each

You should also keep in mind that a DMP requires monthly payments. If you do not continue to follow your plan, there will be a significant negative impact on your credit history and then your credit score.

Learn more: What is a Good Credit Score?

Debt Management Program Pros and Cons


  • Doesn’t directly impact credit score: Enrollment in a debt management plan doesn’t affect one’s credit score.
  • Provides debt solutions without direct impact on credit score: The approach offers a strategy to manage debt without harming your credit score directly.
  • Consistent monthly payments improve credit score: Making timely payments as part of the plan can positively affect your credit score.
  • Amount of debt will be significantly reduced: The total debt owed will be lowered considerably.
  • Debt is paid off significantly faster: Participants in the plan can expect to clear their debt more quickly than they would outside the plan.


  • Will not be able to get new credit: While enrolled in the plan, obtaining new credit is not possible.
  • Affects the length of credit history: The program may shorten your credit history, which can impact your credit score.
  • All credit accounts will be closed: To facilitate the management of debt, all existing credit accounts will be shut down.

Although enrollment in a debt management plan doesn’t directly impact one's credit score, various aspects of the program — such as timely payments, account closures, reduction in amounts owed, and changes in credit utilization rates — might influence the score in both negative and positive ways.

Ultimately, clients who complete the Debt Management Plan often find it easier to secure new credit and loans, suggesting the program's effectiveness in aiding individuals toward financial freedom.

If you’re ready to take control of your financial freedom, contact our expert debt coaches today. Get Started. It’s Free.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined in 2003 and has over two decades of experience in the industry.

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