The Effects of Debt Management Programs on Credit Scores

If you're struggling to pay off your bills every month, a debt management program may be a good option to help relieve some of your financial stress. Before you commit to any such program, however, you should carefully consider its positives and negatives. Debt management programs can help you get out of debt, but they will also limit your financial options.

Credit Score Factors

There are numerous kinds of credit scores, each of which is based on different factors as determined by the company that creates the score. One of the most popular scores, the FICO score, is based on five factors: your history of timely payments, the amount of debt you owe, how long you've had your credit accounts, the number of new accounts you've opened and the variety of types of credit you have, according to FICO.

Management Plans

A debt management plan typically works like this: you go to a credit counseling agency and agree to pay it a single monthly payment. The agency then takes your payment and pays your debts on your behalf. These programs, according to Bankrate, usually last three to four years and are aimed at letting you pay your bills on time---the single largest credit score factor---without having to struggle with making multiple payments at different times.

Debt Management Goals

Consumers use debt management programs to help themselves get out of debt and eliminate as many financial difficulties as possible. These programs allow you to better manage your debt obligations, and though keeping to a strict plan will likely increase your credit score, that is not the main focus of such programs. Further, people who seek out debt management help and create a debt management program often already have low credit score because of their inability to manage credit.

Debt Management Impacts

Debt management programs do not directly impact your credit score, according to Bankrate. While credit reporting agencies include your participation in a debt management program on your credit report, this information does not impact your score. However, some debt management programs prohibit participants from getting new credit during the course of the program, so even if you raise your score with the management plan, you may not be able to get a new loan before you complete the program.