Enrolling in a debt management plan does not directly affect a person's credit score. However, certain aspects of the program, such as timely payments, closing accounts, and smaller payments, can have an impact on a person's credit rating. Debt consolidation is a popular way to reduce monthly payments and lower debt. This can be done through a debt consolidation loan or a balance transfer card.
When consolidating debt, it is important to be aware that it could cause a temporary drop in your credit rating. A debt management plan (DMP) is an agreement between you and your creditors to pay off your debts over a period of time. The payment you make each month will usually be less than the minimum amount you initially agreed to when you paid off the debt. This could mean that it will be more difficult for you to obtain credit in the future.
Most types of debt can be included in a DMP, such as credit cards, personal loans, overdrafts, gas and electricity arrears, catalogs, canceled phone contracts, and payday loans. If your credit score is low when you start a debt management plan, the program will generally have a positive impact. Unlike debt settlement or bankruptcy, using this type of program will not create negative comments on your credit report. A lender would have good reason to wonder if someone who is struggling to pay their credit card debt might struggle even more with monthly mortgage or car loan payments. It's true that during the first 8-10 months of a debt management program, your score could be affected because you close some accounts and that negatively affects your credit utilization ratio. You have the opportunity to rebuild your credit rating after you have completed your debt management plan.
Many credit counseling agencies are nonprofit organizations that offer education and assistance to help people better manage their finances. When you agree to participate in a debt management program, you also agree to close all your current credit accounts. The notation that means that your DMP activity does not have a negative effect on your rating going forward; in fact, it can suggest to lenders that you are actively working to repay all your debts to the best of your ability. The typical debt management plan lasts 3 to 5 years and the long-term gains (credit scores can go up 100 points or more) from making payments on time and eliminating debt far outweigh a brief decline in credit rating. Keep in mind that it's generally not a good idea to replace unsecured debt (such as credit card debt) with secured debt (such as a mortgage or car loan) because you could lose your home or vehicle if you can't pay. Being able to manage a mortgage, car loan, student loans, and credit cards all at once means you have lower credit risk. Some creditors will add DMP or “payment agreement” markers for payments they receive through debt management plans.
The main purpose of a debt management plan is to get consumers used to paying bills on time every month and to reduce the amount owed.
