How does a Debt Management Program affect my credit score?

Will A Debt Management Program Ruin My Credit Score?

credit score effect

Participating in a debt management program will have a positive effect on your credit score for several reasons, the most vital one being that it teaches you the importance of on-time payments.

While there are several other factors in a debt management program, just as there are several other factors in calculating a credit score, the overriding goal of a DMP is to get consumers in the habit of paying bills on time every month and reducing the amount owed so that your credit utilization score improves.

On-time payments account for 35% of your credit score and are the single biggest factor in a FICO credit score, the one used by over 90% of businesses. Amount owed (also referred to as credit utilization) is a close second, making up 30% of the score. Length of credit history (15%), types of credit used (10%) and new credit (10%) are also used in determining your overall score.

Debt management program specifically address the two biggest factors in your credit score – on-time payments and credit utilization – so forget what you’ve heard about debt management programs ruining your credit score. Just the opposite is true. A debt management program is a great way to manage your credit score. Here is a look at how it impacts each component.

History of On-Time Payments

The primary reason people look into debt management programs is because they haven’t been able to keep up with payments on their credit cards. Debt management program clients tend to score high in this category because the program stresses on-time, automated and affordable monthly payments. InCharge credit counselors get you in the habit – and keep you in the habit! – of paying bills on time. The real goal is help you establish a pattern of on-time payments, which will benefit your credit score.

Amount Owed/Credit Utilization

This is the second most important category in determining a credit score. Owing money on a credit card is not a bad thing, as long as you pay down the debt every month. That is where cardholders run into a problem. More than 65% of credit card users carry a balance from month-to-month. About one in five credit card users only pays the minimum. Not paying down the balance has a negative effect on your credit score because it increases your credit utilization.

Credit utilization is a tricky thing because the number of cards you have has a lot to do with how much credit you’re actually using.

Most debt management programs ask you to close all but one credit card account and that could have a temporary negative affect on your credit score. Credit utilization is the percentage of available credit you use each month. The credit bureaus want that number to be 30% or less. The more credit cards you have open, the easier it is to stay under the 30% utilization boundary. Closing a card account could have the opposite effect, though only temporarily.

For example, if your credit card has a $5,000 limit and you spend $3,000 this month, you have utilized 60% (3,000 ÷ 5,000 = .60) of your available credit. That’s too much. However, if you have three credit cards, each with a $5,000 credit limit and you spend the same amount this month ($3,000), you have used only 20% of your available credit (3,000 ÷ 15,000 = .20). That’s very acceptable.

Unfortunately, if you close two of those cards you effectively force yourself above the 30% credit utilization line. However, because the cards are frozen, you should not be accumulating any more debt with them. Instead, you are making payments that reduce the amount owed. As your debt decreases, so does your credit utilization percentage.

When people ask: Why does paying off debt lower my credit score? This is what they’re talking about. The fact is, it’s a short-term setback that doesn’t amount to much more than a tap on your credit score. The goal of a debt management program is to pay off your credit card debt. If you stick with the program, over the long run you will see your credit utilization falling into optimal ranges of 30% or less.

Length of Credit History

Length of credit history is the number of months you’ve maintained credit with a lender. The longer, the better. Lenders want to see that you’ve had successful relationships with creditors and those relationships have lasted many years. A history of opening and closing accounts every few months will hurt you. The fact that you will be asked to close all but one credit card could hurt you in this area. However, if the one card you keep has been open for a decade, the impact should be minor. Consider this your “legacy card.” Just make sure it doesn’t have an annual fee. Use it occasionally, pay it off immediately and reap rewards for your credit score.

New Credit

Shopping around for multiple credit accounts is a bad idea. It makes you look desperate for money and unreliable in the eyes of lenders. You want to limit new credit applications, especially when you need to apply for a car or mortgage loan. Joining a debt management program should have no effect on this area of the credit score.

Types of Credit

Think of this category as a place to show how well-rounded you are. If you have a mortgage loan, auto loan, credit cards and you are paying them all on-time every month, this area of your credit score will be well taken care of. Lenders want to see that you have experience with more than just one type of credit. Joining a debt management program should have no impact on this portion of the score.

Don’t Worry About Credit Score Dropping Early

It is true that for the first 8-10 months of a debt management program, your score could take a hit because you close some accounts and that adversely affects your credit utilization ratio. It’s also possible you will be pinged with a late payment penalty for a month or two because your credit counselor has negotiated new payment dates with credit card companies that don’t match previous dates. This is a temporary blip that should pass after you begin making on-time payments for six consecutive months. Besides, if you’re trying to catch up with bill payments, you probably shouldn’t be out looking for a home or auto loan that will bring your credit score into play.

Impact DMP Has on Credit Score

Enrolling in a debt management program is a long-term decision to eliminate debt so short-term blips on your credit score really aren’t a problem. The typical debt management plan runs for 3-5 years and the long-term gains – typically, credit scores rise 100 points or more – from making on-time payments and eliminating debt far outweigh a temporary negative impact on a credit score.

Ultimately, the best thing you can do for your credit score is improve your ability to make consistent, on-time payments and pay your debt off. Joining a debt management program or speaking with a credit counselor can help you with both areas that make up 65% of your credit score. High marks in both areas will bring high marks on your credit score.


NA, (2013, September 10) Debt Management Plans and Your Credit Report. Retrieved from

NA, ND. A Debt Management Plan: Is It Right for You? Retrieved from