Will a Debt Management Plan Affect My Credit Score?

People borrow money. They incur credit card debt, student loans and automobile loans to pay for items today without having the money for them. Many people struggling with debt consider committing to a debt management plan. Companies offering debt management plans claim to help individuals pay their debt off faster with lower interest charges. In most cases, participation in a debt management plan will not directly affect your credit score.

Purpose of Debt Management Plan

Debt management plans provide a solution for debt-ridden consumers. These consumers often feel like they are drowning in a sea of debt and are unable to catch their breath. Their income is insufficient to pay the bills coming in each month, putting them further and further behind on payments. Credit cards and other forms of debt add late charges to the balance, increasing the amount owed by the consumer. A consumer's credit scores may already be damaged before he begins a debt management program by missing payments.

How Plan Works

Consumers work with credit counseling agencies to initiate a debt management plan. The credit counseling agency contacts the consumer's creditors in an attempt to negotiate a lower interest rate and eliminate additional service charges on the accounts. After negotiating with each creditor, the credit counseling agency consolidates the payments for each creditor into one amount for the consumer, and the consumer pays the agency one payment. The agency, in turn, pays the creditors their separate amounts.

Credit counseling agencies sometimes charge a fee for this service, and some can be substantial. In addition, some agencies can be late with or miss payments, which ultimately can hurt the consumer's credit score. Other agencies sometimes even encourage consumers to make late payments, claiming that doing so will make creditors more willing to negotiate. Reputable agencies, often nonprofit organizations, will make sure any payments from a debt management plan are paid to creditors on time.

Benefits of Debt Management Plan

For struggling consumers, a debt management plan can reduce the anxiety and worry associated with the inability to meet their current payments. The debt management plan includes a manageable payment for the consumer within his current budget constraints. Creditors stop calling the consumer's home and workplace. Each account that had been past due is brought current. Over the life of the debt management plan, the consumer sees her account balances decrease and eventually be satisfied.

Impact on Credit Score

Many consumers worry about the impact that participating in a debt management plan will have on their credit score. Creditors may report that the account is included in a debt management plan when they report payment history to the credit bureaus. This statement is usually included on the consumer's credit report. However, there is no impact on a consumer's credit score.