Do debt management plans hurt your credit score?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Question for the expert

Dear Opening Credits,
My wife and I have decided to enroll for a debt management plan. The decision was based on the fact that, although our credit score is good currently, we were not making any dents in paying down our debt (roughly $35,000) by making slightly-above-minimum payments on each account every month. We have never missed a payment nor been delinquent, but we are hopeful this plan will get us out from under this in a much shorter time span. We do also have a mortgage and two car loans, which we also have never been late on nor missed a payment. How severely do you think our credit score will be impacted? The balances on the cards enrolled in the program were near maxed out already, so I cannot imagine the impact being much more negative than it already is. Also, our one car is a lease that will expire while we are under this DMP plan. Will I be able to extend or obtain financing for a car while on this program? -- Jim 

Answer for the expert Dear Jim,
How great that you and your wife put your collective feet down. Acting as a unified force, you banded together and said, "Enough is enough! We're getting out debt, even if that means ruining our credit!"

But hold up, Jim. It seems you're a little confused about what makes a good or bad credit rating. Many people presume that their scores must be high because they have never missed a payment cycle or if offers for new accounts continue to flow in, then they're shocked when they find out otherwise. The only way to tell is by checking, so pull your reports from the three credit reporting bureaus and get a hold of your FICO scores from

How does a Debt Management Plan (DMP) affect a score, though? It doesn't. FICO scoring models only draw from the data listed on a consumer credit report. Paying debts with the assistance of a third-party is not factored in at all. Here are the five components that play into a FICO credit score:

Payment history (35 percent): This is the most significant part of your credit score, and it includes how you've paid on all of your accounts. It also assesses anything in collections, if you've filed for bankruptcy or owe legal judgments and fines. With a debt management plan, you'll continue to make steady payments, so unless you skip a cycle when you start the plan, you will still be doing well.

Amounts owed (30 percent): The second-weightiest factor is how much you owe in relation to the amount you can borrow. If you're at your limit (which you are), your scores will suffer. As you delete the debt, however, they will rise. Because the repayment time frame for a DMP is three to five years, if you stick to the schedule, it will help in this area.

Length of credit history (15 percent): Now this is where a debt management plan can be problematic. While you're on the plan, you're expected to not get into any new credit contracts. If you don't have an open card (clients are usually permitted to have one active account), not using credit at all can be detrimental. Still, this is a minor factor when compared to payment history and amounts owed. If you do have a card, use it wisely as you're deleting the debt to help your score climb.

New credit (10 percent): Each time you apply for credit, your score will drop a bit. Therefore, not pursuing credit -- as stipulated in the DMP agreement -- will help you stay out of over-application trouble.

Types of credit used (10 percent): Lenders want to know how you've done with many types of financial obligations. Since you have a home and car loan as well as a lease, you're proving that you can handle multiple financial obligations.

Regarding your car lease, there are no rules surrounding debt management plans and reapplication. However, lenders and other businesses who see the notation on your credit report are free to make a negative, neutral or positive determination about participation. To find out what your leasing company thinks, call and ask. The more you know now, the better.

See related: FICO's 5 factors: The components of a FICO credit score

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Updated: 11-24-2017