Paying off large amounts of debt can be a daunting task. If you’ve recently fallen behind on payments, have more cards than you can manage, or have payments that are too high, rest assured – you’re not alone.
There are many debt relief options available for those looking for help to get out of debt fast. One of the most effective options is using a Debt Management Plan (DMP).
But do debt relief programs like Debt Management Plans hurt your credit? Before deciding which debt relief option is best for you, be sure to explore the following pros and cons of using a debt management program.
Debt relief (or debt settlement) is a program offered by third-party debt relief companies to borrowers struggling to make debt payments. Typically, these companies encourage borrowers to use money meant for debt repayment for savings or for other bills and obligations.
While the borrower is saving, the company tries to negotiate with creditors for lower interest rates and monthly payments on the remaining amount owed. In theory, this creates a more manageable payment plan for the borrower and a full repayment for the lender.
However, these programs do not always go as planned. Many times debt relief companies are not able to negotiate a lower payment for all of your debts. This can have a drastic effect on both your credit and your financial security:
An alternative to a debt relief program is a Debt Management Plan (DMP). Credit counseling companies such as credit.org offer Debt Management Plans to borrowers who are struggling to make multiple or high monthly payments.
Unlike many third parties, credit.org works directly with every client to determine the best ways to handle every financial situation. If you qualify for a DMP, a debt counselor will negotiate with creditors on your behalf to help get you lower interest rates and monthly payments.
When you agree to take part in a debt management program, you also agree to close all of your current credit accounts. A notation is made on your credit history to indicate to lenders that you are on a DMP and cannot have any new lines of credit. This notation is removed once you complete or exit your DMP.
The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score.
When you agree to close all of your credit accounts, your credit history stops. Lenders and credit agencies like FICO and VantageScore use your credit history to generate a credit score. A temporary pause in your available credit may have a negative effect on your score.
However, once you’ve left your DMP, the freeze on your credit is removed, and you can continue to apply for and use your credit. The notation signifying your DMP activity does not have a negative effect on your score going forward – in fact, it may suggest to lenders that you actively work to pay all of your debts to the best of your ability.
Additionally, DMPs are designed to be paid off with regular monthly payments over about 4 years. When you sign up for a DMP, your monthly payments are automatically taken out of your bank account every month. These timely payments over the years will have a very positive impact on your payment history.
If you’re curious to see exactly how much of an effect a DMP has on your credit score, take a look at this general credit score breakdown:
You should also keep in mind that a DMP requires monthly payments. If you do not continue to follow your plan, there will be a significant negative impact on your credit history and then your credit score.
Learn more: What is a Good Credit Score?
Pros:
Cons:
Although enrollment in a debt management plan doesn’t directly impact one's credit score, various aspects of the program — such as timely payments, account closures, reduction in amounts owed, and changes in credit utilization rates — might influence the score in both negative and positive ways.
Ultimately, clients who complete the Debt Management Plan often find it easier to secure new credit and loans, suggesting the program's effectiveness in aiding individuals toward financial freedom.
If you’re ready to take control of your financial freedom, contact our expert debt coaches today. Get Started. It’s Free.