How a Debt Management Plan Affects Your Credit: Pros and Cons

A person on a debt management plan holding an envelop, pulling out a credit report.

How a Debt Management Plan Affects Your Credit: Pros and Cons

Paying off high-interest credit card debt and other bills can feel impossible when your income barely covers the basics. If you’ve fallen behind, are juggling multiple balances, or facing late fees, you’re not alone; there’s help available.

One effective way to regain control is through a debt management plan (DMP). This structured approach helps you pay off personal loans, credit cards, and other unsecured debts in full, often faster than going it alone. But how does it affect your credit, and what are the long-term consequences?

Let’s walk through the pros and cons of a debt management plan, how it works, and whether it’s the right fit for your financial situation.

What Is a Debt Management Plan?

A debt management plan is a type of repayment program that allows you to combine multiple debts into one payment plan, usually with better terms. Nonprofit credit counseling agencies like Credit.org offer these plans as part of their mission to help people get out of debt without declaring bankruptcy.

Here’s how a DMP works:

  • A certified credit counselor reviews your budget, debts, and goals
  • If a DMP is a good fit, they help you create a structured repayment plan
  • The agency contacts your creditors to negotiate lower interest rates
  • You agree to make one monthly payment to the agency
  • The agency distributes those funds to each creditor
  • During the plan, you cannot open new lines of credit

A notation is added to your credit report indicating that you are enrolled in a DMP. This is not a negative mark and is removed once the plan is completed or canceled.

Most DMPs are designed to be completed in 3 to 5 years. During that time, your steady payments can improve your standing with lenders and help you rebuild trust in the eyes of credit bureaus.

Are only Certain Debts Included in a Debt Management Plan?

Debt management plans are most helpful for unsecured debts like:

  • Credit card bills
  • Medical debt
  • Personal loans
  • Store charge cards
  • Certain debts in collections

However, they typically don’t cover secured debts like a car loan or mortgage. These loans are backed by property, which lenders can repossess or foreclose if payments stop.

Debt Management Plans also exclude most student loans and credit union loans, but some lenders may still choose to participate. It depends on whether the creditors agree to the proposed repayment terms.

Any reputable credit counseling agency will offer counseling and advice for other debts, like student loans, that might not be included in a debt management plan. Ask your credit counselor if they can help with things like student loans and mortgage debt; any agency certified by HUD to provide housing counseling has undergone extra vetting and should be considered more trustworthy.

From the FTC: How to Get Out of Debt

The Role of a Credit Counseling Agency

It’s critical to work with a nonprofit credit counseling agency when enrolling in a DMP. Organizations like Credit.org are focused on your long-term success, not charging hidden fees or pushing products.

A reputable agency will:

  • Offer free or low-cost credit counseling
  • Help you explore other debt relief options
  • Provide educational tools to help you make better money choices
  • Explain how a DMP fits into your goals for a better financial future

We also support our DMPs with the educational course Roadmap to Financial Freedom, which helps you understand your role in the debt management plan and helps make your plan a successful one.

From the CFPB: What is Credit Counseling?

Two women having a conversation in an office setting concerning how a DMP affects credit.

Pros of a Debt Management Plan

A debt management plan offers many advantages for people overwhelmed by debt. Here are some of the main benefits:

Lower Interest Rates

One of the biggest perks is the potential to negotiate lower interest rates. A credit counseling agency may be able to reduce the rates on your credit card debt significantly, making it easier to pay off your balances faster.

Single Monthly Payment

Instead of keeping track of multiple due dates and minimum payments, you’ll make one simple monthly payment through your counseling agency. This makes managing your bills less stressful and helps you stay consistent.

Waive Fees and Stop Late Charges

Many creditors agree to waive fees or stop charging additional late fees once you’re enrolled in a debt management plan. This can help you save money and get back on track without extra penalties.

Faster Debt Payoff

With lower interest and no new charges, you’ll likely pay off your debts much sooner than you would on your own. Many people who follow their structured repayment plan are debt-free within five years.

Financial Accountability

You’ll work with a certified credit counselor who helps you create a budget, set financial goals, and stick to your plan. This kind of support is invaluable when working toward a better financial future.

Peace of Mind

Getting expert guidance and a clear payment plan can reduce stress and help you feel more in control of your financial obligations.

To learn more, visit: What is a Debt Management Plan and How Can It Help You?

Cons of a Debt Management Plan

Debt management plans aren’t a perfect fit for every consumer, and there are a few drawbacks to be aware of:

Closed Credit Accounts

To join a DMP, you’ll need to close all your credit card accounts. This can lower your length of credit history and reduce your available credit, which may impact your credit score in the short term.

No New Credit During the Plan

While enrolled, you typically can’t apply for new credit cards, debt consolidation loans, or other forms of credit. This is necessary to avoid falling deeper into debt, but it may feel restrictive if you need financing for emergencies.

Monthly Commitment

You must make your payment on time every month to avoid dropping out of the program. Missed payments can hurt your credit and cause your creditors to withdraw from the agreement.

Doesn’t Cover All Debts

As mentioned earlier, debt management plans usually cover unsecured loans and credit card debt, but not secured debts like car loans or mortgages. Some creditors, such as certain credit unions or private lenders, may also choose not to participate.

From Consumer.gov: Debt Explained

How It Compares to Other Debt Relief Options

A debt management plan is not the only solution available. Other debt relief options include:

  • Debt consolidation loans
  • Bankruptcy
  • Debt settlement through a debt settlement company
  • Negotiating directly with your creditors

However, many of these come with risks. Settlement may damage your credit and include large fees. Bankruptcy has long-lasting consequences. And consolidation requires a good credit score to qualify; then you end up with a new loan.

Compared to these choices, a debt management program is often the most balanced option. It doesn’t involve taking on new debt or damaging your credit report with a bankruptcy filing.

For more guidance, check out: Debt Management vs Debt Settlement: What’s the Difference?

What Happens After You Complete a Debt Management Plan?

Finishing a debt management plan is a major milestone. Once you’ve made your final payment, all the debts included in the plan should be paid in full. At that point, the notation on your credit report showing DMP participation is removed, and you are free to apply for credit again.

Even better, you’ll likely have:

  • A lower debt-to-income ratio
  • Fewer accounts in collections
  • A stronger payment history
  • Better financial habits

These improvements can help you qualify for lower interest rates on future loans or even purchase a home.

Can You Rebuild Credit After a DMP?

Yes. Once your DMP is complete, you can take specific steps to rebuild your credit:

  • Apply for a secured credit card to show new, responsible usage
  • Keep credit card balances low and paid in full each month
  • Avoid applying for too many new accounts at once
  • Monitor your credit report for any errors
  • Keep old accounts open when possible to build history

A debt management plan does not stop you from improving your credit in the long term; in fact, it helps lay the foundation for stronger financial health. Many people find their credit scores are higher at the end of a DMP than they were at the beginning.

For deeper insight, see: The Impact of a Debt Management Plan on Your Credit Score

When Should You Avoid a Debt Management Plan?

While a debt management plan works well for many, there are times when it might not be the right fit:

  • If most of your debt is secured debt like a mortgage or car loan
  • If your income is too low to make even reduced payments
  • If you want to settle your debts for less than the full amount owed
  • If you’re looking for very short-term solutions to debt

In these cases, you may want to speak with a financial institution, bankruptcy attorney, or explore a different type of repayment program.

If you’re uncertain, read: When Should You Consider a Debt Management Plan?

A Debt Management Plan Can Help You Save Money

By combining debts into one affordable monthly payment and securing lower interest rates, a DMP can help you save money in the long run. Even if your monthly payment stays about the same, you’ll pay off your debts sooner, without taking out a new loan.

Many people also save by avoiding extra interest, fees, and penalties over the course of the repayment period. You might even find that some creditors will waive fees when they agree to participate in the plan.

Final Thoughts: Is a Debt Management Plan Right for You?

A debt management plan can be a powerful step toward financial freedom. It allows you to:

  • Pay off your debt sooner
  • Consolidate credit card bills without taking on new loans
  • Work with a certified credit counselor who has your best interest in mind
  • Create a payment plan that fits your budget
  • Reduce interest rates and waive fees with some creditors
  • Avoid the long-term damage of bankruptcy or default

If you’re serious about improving your financial future, talk to a certified credit counselor and explore your options. The right plan can give you a fresh start and set you up for lasting success.

Call today for a free counseling session to find out how a Debt Management Plan (or debt management program) can help you achieve financial freedom.

Jeff Michael
Article written by
Jeff Michael is the author of More Than Money, a debtor education guide for pre-bankruptcy debtor education, and Repair Your Credit and Knock Out Your Debt from McGraw-Hill books. He was a contributor to Tips from The Top: Targeted Advice from America’s Top Money Minds. He lives in Overland Park, Kansas.
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