If your financial problems have degenerated to the point that you need credit counseling and a debt management plan to help you dig your way out of debt, chances are your credit rating has already taken a severe blow. However, a debt management plan can have a detrimental effect on your credit if you've been a model borrower so far.
How Debt Management Plans Work
A credit counseling agency can determine if you qualify for a debt management plan (DMP). If so, the agency will work with you and your creditors to reduce your payments and/or interest to work within your budget, allowing you three to five years to repay your debt under the terms of the plan. While enrolled in the program, you pay the credit counseling agency, which in turn pays your creditors. A nominal fee is usually included in your payment.
If You Have Good Credit...
A debt management plan can actually have a negative effect on your credit if you've paid your bills on time and have used credit wisely in the past.
"Creditors may report that you are on a DMP and are not paying as originally agreed although they have accepted the reduced payment," the National Foundation for Credit Counseling reports. This notation on your credit report can make creditors and others who look at your credit become wary.
However, Bankrate's Steve Bucci's writes that "the fact the account is part of a DMP is not calculated in your FICO credit score. So the sole fact that the account is part of a DMP does not damage your score."
If You Have Bad Credit...
The good news is, if your credit has already been affected by late payments, not paying bills or maxing out your credit cards, then a DMP probably won't hurt your credit anymore than it already has been hurt.
Aside from filing bankruptcy, making payments late or not at all has the most negative effect on your credit. For that reason, a DMP notation on your credit report is not going to make that much of a difference. "The late pays hurt, not the comment that they're paying it through a counseling program," Experian's Maxine Sweet tells Bankrate.
Choosing an Agency Wisely
The credit counseling agency you choose can make all the difference in the effect a DMP has on your credit report.
It's important to choose a reputable agency before you agree to a DMP. Find an agency through the NFCC (see Reference section) to reduce the odds of being preyed upon by an agency that can cause you problems by making your payments late or not at all.
An agency that asks you to stop making payments before enrolling in a DMP, or asks for a large up-front fee is a sign that you need to look further. And once you do select an agency, contact your creditors and ask for something in writing indicating that they agree to the terms. Then, follow up to make sure your payments are being made on time.
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