Debt Management and How it Effects Your Credit Score

As credit counseling professionals, we are often asked, by clients and the general public, about the effect of a Debt Management Program on an individual’s credit score. Though certainly a valid concern, it is unfortunately often fueled by myths and misinformation.

Firstly, the main objective of a Debt Management Program (DMP) is to assist clients who are already experiencing difficulty managing their creditor obligations and other expenses. At this stage, they may already have a credit score that has been negatively impacted by late payments and accounts in collection. That being said, those factors will continue to impact the score even after someone is well into a DMP. The good news is that the weight of these factors will diminish over time as long as the DMP participant makes timely payments as agreed for the duration of their enrollment. Maintaining on-time payments will increasingly offset prior negative credit history over time.

While a client is enrolled in a DMP, their creditors may report that the account is included in a managed payment plan. This can be misconstrued that, being on a DMP can negatively impact a credit score. Let’s put this myth to rest with the following explanation provided directly from the Fair Isaac (FICO) website. "Using a credit counseling service and having this situation reported in your credit report should not have any negative impact to your FICO® score." The rest of the FICO explanation can be found at myfico.com on their Support Center website. FICO is the company that created and maintains the formula for determining credit scores, so they are considered to be the authority on this matter.

Being your own credit advocate is the best way to handle the situation while enrolled in a DMP. Using the service available at annualcreditreport.com is an easy and free way to monitor your credit report (with each of the three credit reporting agencies) on an annual basis. Recovering from a damaged credit history is not a fast process. Success takes time measured in years and effort measured in timely regular payments. Signing up for a DMP can help by providing the knowledge and experience of our NFCC-Certified credit counselors and the benefit of reduced interest rates and lower payments. I In most cases, a DMP can substantially reduce the amount of time and money one would have to pay in order to become debt-free.