The pros and cons of debt management plans

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

Ask a question.

Question for the expert

Dear Opening Credits,
I read from your bio that you used to be a consumer credit counselor. Well, I went to one, and I really regret it. They put me on a plan, and now my credit is ruined. I went to buy a truck, and they told me that my score is too low to qualify and I have a black mark because of credit counseling. So now what? I am in for another couple of years and still owe about $23,000. -- Bill 

Answer for the expert Dear Bill,
Yes, I most certainly was a credit counselor for a while, and I loved the job. It was gratifying to go through people's budgets and find ways to improve their situation so they could meet their goals. And that's what a good counselor does -- work with the client, matching their needs and desires with sensible resolutions. Then, after reviewing all the ups and downs of each possibility, the client decides what to do.

Maybe you did get a dud, though -- someone who didn't listen to you at all but instead put you on a debt management plan (DMP) without bothering to reveal its potential drawbacks. Whatever happened, you agreed to go on the agency's plan and now you're suffering from its negative effects.

Or are you?

What, really, is the impact of paying your liabilities through a third party service? To answer that question, we'll have to do a bit of time travel ...

Return to the months or years prior to signing up for a debt management plan. Ask yourself what your financial circumstances were like. If you had a hard time paying your bills in a timely fashion and were overburdened with debt -- a safe assumption, as you still owe over $20,000 -- it was probably pretty bad. Therefore, your credit score took a severe hit long before your fateful appointment. You see, payment history and the amount you owe in relation to how much you can borrow are the two biggest factors in a FICO score, which the finance company likely used as one of the loan qualifying criteria. Fail to do well in those categories and your score takes a dive.

Now let's look at how a DMP might have actually improved your credit score. The agency set you up on a plan where you send substantial and consistent monthly payments, right? Well, then you would be making strides in deleting your balance and establishing a steady payment pattern: two actions that would cause your credit score to go up. Remember that debt management plans have no actual impact on a score -- good nor bad. It's just not considered in the mathematical model that shoots out those numbers.

This is not to say that using an agency's plan would make a lender automatically perceive you as a great credit risk, however. When they see a notation of your participation (not all creditors send that information to the credit bureaus, but some do) they are free to have an opinion about it. For many lenders, it's a non-issue. For others, though, it is that "black mark" you mentioned. Some even consider a debt management plan to be akin to bankruptcy.

But what's most important, Bill, is for you to turn your attention to the main issue: You're in debt, and you've got to get out of it. You can remain on the DMP or jump ship. That's up to you, as there's no penalty or wait period to stop. But do apply all available cash to those you owe -- and never, ever, miss a due date. It also may be wise to delay purchasing a vehicle until your net worth is positive and your credit score has rebounded.

Finally, don't pin the blame on the credit counselor or the organization for your low scores. That happened before you walked through the credit counseling agency's door.

See related: The FICO 5: The 5 basic factors of a credit score, What sort of credit card debt help is best for you?

Meet's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday,'s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.

Updated: 11-24-2017