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Can Debt Management Hurt Your Credit Score?

We are often asked, by clients and the general public, about the effect of a Debt Management Program on an individual's credit score. This is certainly a valid concern, but it is often fueled by myths and misinformation.

First, the main objective of a Debt Management Program is to assist clients who are already experiencing difficulty managing their creditor obligations and other expenses. This creates a situation where they may already have a credit score that is impacted by late payments and collection accounts. That being said, those factors will continue to impact the score even after someone is well into a payment plan. The good news is that the weight of these factors will diminish over time as long as the DMP participant makes payments as agreed while they are enrolled. Maintaining on-time payments will increasingly offset prior negative credit history over time.

While enrolled in a Debt Management Program, creditors may report that the account is included in a managed payment plan. This has led to some misinformation that, somehow, this can impact a credit score negatively. Let's put this myth to rest with the following explanation directly from the FICO website. "Using a credit counseling service and having this situation reported in your credit report should not have any negative impact to your FICO® score." The rest of the FICO explanation can be found at myfico.com on their Support Center website. FICO is the company that created and maintains the formula for determining credit scores, so they are the final word on this matter.

Being your own credit advocate is the best way to handle the situation while enrolled in a Debt Management Program. Using the service available at annualcreditreport.com is an easy and free way to monitor your credit files with each of the three credit reporting agencies on an annual basis. Recovering from a damaged credit history is not a fast process. Success takes time measured in years and effort measured in timely regular payments. Using a Debt Management Program helps by providing the knowledge and experience of Certified Financial Specialists and the benefit of reduced interest rates and lower payments which, in most cases, substantially reduce the amount of time and money one would have to pay in order to become debt-free.