Debt management plans (DMPs) are the debt reduction programs recommended by credit counselors. Do not confuse debt management plans with debt negotiation or debt settlement, both of which have much different impacts on your credit score. Under a DMP, your credit counselor will work with you and your creditors to create a map to your financial freedom.
Definition
You may only sign up for a debt management plan if a credit counselor has recommended one for your specific circumstances. Once you sign up for a DMP, the counselor will contact your creditors to negotiate lower interest rates or payoff balances. DMPs typically last three to four years, and during that period you make one monthly payment to the credit counseling organization which, in turn, pays your creditors.
Pros
Participating in a DMP may help you to pay off your credit cards more quickly. Also, the appearance of a DMP on your credit report doesn't affect your credit score at all. According to a Bankrate article, the Fair Isaacs Corporation doesn't believe in punishing consumers who are taking responsible actions to improve their credit standing. Those who utilize DMPs have often defaulted on past payments, which has a far more negative effect on a credit score, impacting your credit score for up to seven years.
Cons
Although a DMP doesn't impact your credit score, some lenders may be hesitant to lend to you because of its appearance on your report. While you're paying off your debts, a DMP indicates that you couldn't pay off the full amount, which may make lenders leery of lending you money. However, according to Experian's vice president of consumer affairs, Maxine Sweet, most lenders look at the credit score and not the comments when considering loan applications. By paying off your debt faster, you will boost your credit score and be eligible for better credit offerings.
Considerations
With so much information about debt negotiation, debt settlement and credit counseling floating around, it's vital to work with a reputable credit counseling agency. The Federal Trade Commission recommends working with an organization listed on the National Foundation for Credit Counseling website. A reputable credit counselor will not only help you to get your debt paid off more quickly, but will also assist in putting together a budget so that you don't end up in such dire financial straits again.
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