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How a Debt Management Plan Can Impact Your FICO® Scores

A debt management plan can help you tackle unwieldy credit card debt, but how does it impact your FICO® Scores? Here's what you should know.

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Debt management plans are intended to help you get out of credit card debt, but because you're not paying back the debt as you originally agreed, you may be wondering how your FICO® Scores may be impacted.

All in all, the pros of debt management plans often outweigh the cons. But understanding the relationship between a debt management plan and your FICO® Scores can help you determine whether it's the right move for you.

Will a Debt Management Plan Hurt My Credit Score?

The fact that you are working with a credit counselor or getting on a debt management plan won't directly impact your credit score. While you'll make your monthly payments to the credit counseling agency under such a plan, it isn't a debt collector, so there are no new credit accounts being added to your credit reports.

Additionally, while individual creditors may add a notation to the tradeline on your credit report that you're enrolled in a debt management plan, that comment isn't considered negative when a FICO Score is calculated.

That said, other creditors can see the notation and it may influence their decision whether or not to extend credit to you.

But while a debt management plan won't directly impact your FICO® Scores, you may experience some indirect consequences due to how these plans are structured.

Payment History

If you're already behind on payments, those missed payments may have already done some damage to your FICO® Scores. But once you get on a debt management plan, you may find your payments to be more affordable, which can help you re-establish a positive payment history.

In some cases, your creditors may even offer to re-age your accounts and update the status to current instead of past due, which could help improve your FICO® Scores.

And because your payment history is the most influential factor in your FICO® Scores, a debt management plan can help boost your score.

Credit Utilization Ratio

Credit counseling agencies may require you to close the credit card accounts that you're including in your debt management plan, which can significantly reduce your available credit without getting rid of the balances.

This can impact your FICO® Scores because the score still considers balances and other negative information on accounts with a closed status. The result is that your credit utilization ratio could immediately spike.

That said, closing the account also means that you can't add more debt. So, as you work to pay down your balance, your utilization ratio will decrease along with it, helping your FICO® Scores recover.

Length of Credit History

If you close an old account, the details will remain on your credit reports for up to 10 years, but it can negatively affect your length of credit history, which incorporates how long your accounts have been opened, the average age of your accounts and other factors.

That said, your length of credit history only makes up about 15% of your FICO® Score, so your payment history and credit utilization ratio are far more important.

Are the Potential Credit Issues Worth It?

Unlike debt settlement, which can remain on your credit reports for up to seven years, and bankruptcy, which can stay on your reports for up to 10 years, there are no long-term negative credit consequences to a debt management plan — as long as you stick to the agreed-upon payment plan.

As a result, the benefit of getting some relief with your interest rates and monthly payments likely outweighs the short-term negative impact on your FICO® Scores.

In fact, you may not even need to use your FICO® Scores during that temporary period, as credit counseling agencies generally recommend that you avoid applying for new credit accounts, particularly credit cards, while you're on a debt management plan.

So, if you're struggling to keep up with your credit card payments, your credit isn't good enough for a balance transfer credit card or debt consolidation loan, and you want to avoid debt settlement and bankruptcy, a debt management plan can be well worth it.

The Bottom Line

A debt management plan can temporarily negatively impact your FICO® Scores. But in the long run, obtaining a form of debt relief and paying off your balances over time can have a much more significant positive impact on your finances.

If you're considering a debt management plan, consult with a credit counselor to see if it's right for you. You can find nonprofit credit counseling agencies through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Get your FICO® Score from FICO, for free. No credit card required.

Ben Luthi

Ben Luthi has been writing about money and travel for seven years. He specializes in consumer credit and has written for several major publications and industry leaders, including U.S. News and World Report, Fox Business, Wirecutter, Experian, and Credit Karma.

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