How Does a Debt Management Plan Affect Your Credit?

The act of enrolling and participating in a debt management plan through a qualified credit counseling agency usually has no direct impact on your credit. However, there are many indirect implications to your credit report and overall credit profile for being part of these debt reducing programs.

Damage Already Done

If you are seriously considering signing up for a credit counseling debt management program, the bulk of the damage to your credit profile may already have been done. Although anyone with unsecured debt is eligible to sign up for a debt management program, those with debt levels causing their finances to spiral out of control are more likely candidates. By the time you sign up, your credit report may reflect late payments and high debt-utilization ratios -- two items that will heavily weigh on your credit score.

Accounts Closed

Once you have signed up for the debt management plan, your credit counseling agency will contact your creditors on your behalf and request that your accounts be enrolled in the program. Creditors are under no obligation to comply with this request, but if they do, the creditor must agree to lower your interest rates and make other concessions. The creditor will do these things to improve chances of getting paid the full balance and avoiding the account being charged off. Your creditors, however, may require that any enrolled accounts be closed. This closure will affect your overall available credit line and increase your debt-utilization ratio. Additionally, if your longest established account is closed, your credit history will be shortened. These actions have a detrimental impact on your credit score.

Restricted on Obtaining New Credit

Creditors that accept the plan's enrollment request may also require that you not open any new credit accounts while you are on the debt management plan. Opening a new account or even applying for a new account in some cases is enough for the creditor to withdraw from the program and subject you to the penalty interest rate and recoup past interest. Your credit report will note the accounts that are enrolled in the debt management plan. This note is usually enough for new creditors to decline your application for new credit as they understand the requirements imposed by creditors of other organizations. The note itself of being enrolled in a debt management plan has no direct impact on your credit score.

Rebuilding

Your credit counseling agency will ensure that payments are made to the creditors in a timely fashion. Each month that payments are made on time will help your credit score, provided you maintain good standing with other accounts. As you send payments in, the balances will be rapidly reduced as you are no longer subject to the high penalty interest rates or other fees. During the program, you will re-establish a solid credit history and receive financial education on how to better manage your debt. Subsequently, you should be in a position to rebuild your credit score -- perhaps to levels higher than you ever had -- as you successfully participate and complete the program.