Does a Debt Management Plan Ruin Your Credit?

Debt management plans assist consumers whose bills are so out of hand the consumers cannot handle their finances on their own. A good DMP frees you of debt within three to four years if you make your payments as agreed, according to the Bankrate financial website. Your credit is likely battered by the time you start a DMP, but the plan itself improves rather than damages your credit rating further.

Definition

A debt management plan is one of the options commonly offered by credit counselors for clients who are deeply in debt. The plan is a formal repayment agreement, negotiated with your creditors by the counseling firm. Often your counselor negotiates helpful concessions, like lower interest, removal of late payment penalties and re-aging of your account so it shows up as current at the TransUnion, Experian and Equifax credit bureaus. In exchange, you agree to send payments to the counseling company, which distributes the money to the proper creditors until your debt is completely paid off.

Effects

Being in a DMP does not ruin your credit. Such plans typically improve your credit rating because your credit counselor makes all payments on time. Bill payments are 35 percent of your credit score, the MyFICO scoring site advises, so on-time payments raise your score. Another 30 percent comes from the amount of debt you owe; that area improves as you pay down your balances through the plan.

Considerations

Your credit can be ruined if your credit counseling company does not forward your payments in a timely manner or if it goes out of business. Immediately stop any electronic debits to the company if it goes out of business, and contact your creditors directly. Ask them if you can continue the debt management plan under the previously negotiated terms, and send the payments yourself. Your credit continues its improvement as long as you continue on-time payments.

Warning

A DMP is different from debt negotiation or settlement. Settlement companies claim to help you, but they often ruin your credit by telling you to stop making payments, Maxine Sweet of the Experian credit bureau warns. Supposedly, they have more leverage to negotiate a reduced payment amount if your account is delinquent, but they might not be successful and your credit score drops in the meantime. Some companies try to pressure you into a debt consolidation loan because they make a profit from the financing. Stick with nonprofit credit counseling agencies rather than settlement firms.