Enrolling in a Debt Management Plan can indeed be quite helpful in handling your finances especially if you already have tons of bills piling up apart from your growing debt. However, one can ask about the effects of the Debt Management Plan on any applicant’s credit. Will it have an effect at all? If so, how large will the effect be?
To find the answers, let us focus on the first question. Do debt management plans hurt your credit? The answer to this is simple. The Debt Management Plan indeed has an impact on a person’s credit, albeit indirectly, both in the positive and negative sense.
THE CREDIT AND CREDIT SCORE
Before going any further, let us first define the terms credit and credit score.
The former refers to your ability to secure a loan or any merchandise and service with a deferred payment plan. This comes with the promise of payment within a set period of time.
The credit score is the numerical equivalent of your capability to secure credit in the bank or any other financial institution.
How can these be affected by the Debt Management Plan?
FINANCIAL ASPECTS AFFECTED BY THE DEBT MANAGEMENT PLAN
There are certain aspects of a person’s financial structure that could be affected by the Debt Management Plan. These certain aspects, when affected, can have an impact on your long-standing credit.
Some of these aspects are as follows:
1. THE CREDIT REPORT
While enrolled in a Debt Management Plan, this particular condition will be noted in your credit report. As long as this is active, you will not be granted additional credit. Once you are done with a Debt Management Plan though, it will be noted on the report as well and you could be considered for additional credit once again.
So if you want to buy a property for example and would have to secure a loan to get the funds, schedule it after you pay off the Debt Management Plan. By doing this, your ability to secure additional credit will not be affected by the DMP.
You may also pay off your mortgage even while enrolled in a Debt Management Plan without having to worry about payments being canceled or deferred. Enrollment in a DMP does not affect mortgage at all.
WHY IS THIS SO?
The DMP works in such a way that, it will allow you as the one in debt to pay off what you owe to the creditors over time. These regular payments will significantly lower the debt which can decrease your financial obligations and allow you to be eligible for additional credit applications in the future.
Additionally, enrollment on a Debt Management Plan will appear on your credit record for as long as 6 years. After which, it will be removed from record even if the debt is not paid in full. This goes the same for any negative information about your credit history.
Any payments made prior to removal will be reflected on the credit. The critters also have the option to put you on default on the removal of the DMP on record.
2. THE CREDIT SCORE
Although your FICO score will not be affected by your enrollment in a Debt Management Plan, this may directly affect your bank accounts. Upon enrollment, your accounts may be frozen or closed. This will, therefore, affect your ability to pay your debt, because you will lose some of your funds.
If this happens, your credit score will be decreased significantly.
This being said, there are ways to overturn the negative effects of the Debt Management Plan to your credit. These are as follows:
AUTOMATED PAYMENTS
Since the Debt Management Plan is designed to get you out of debt, it would be easy to set up a consolidated payment plan where all payments will be made out electronically to the debt consulting organization, which they can distribute to the creditors accordingly.
These automated payments will allow you to pay in regular intervals which can be good for your credit score. It will also have a significant positive impact on your credit history.
THE CREDIT SCORE BREAK DOWN
To further understand how the Debt Management Plan can affect credit and credit score, here’s a breakdown of a specific credit score computation based upon the Debt Management Plan and your credit history:
- 35% — PAYMENT HISTORY
This will positively be affected by the Debt Management Plan as long as payments are made on time.
- 30% — AMOUNT LEFT TO BE PAID
This will positively be affected as regular payments will help it decrease significantly.
- 15% — CREDIT HISTORY LENGTH
This will be affected negatively because accounts will be closed upon enrollment to the DMP.
- 10% — NEW CREDIT INQUIRIES
As mentioned earlier, you will not be able to do this as long as you are enrolled in the Debt Management Plan. Despite that, not having new credit will lead to positive effects on the credit score.
- 10% — CREDIT MIX
This particular factor is based on each individual situation. It means that your credit mix may differ from another person’s. This is why it would be difficult to calculate how the DMP could affect this particular aspect of the credit score in the future.
These are just some of the factors that can affect your credit and credit score relating to the Debt Management Plan.
For now, it is good to know that although there are negative effects to enrolling in a Debt Management Plan for your credit and credit score; these can easily be rectified as well. Just make sure to be conscientious and prompt with the payments and everything will turn out for the best in the end.
RESEARCH QUESTIONS
WHAT IS THE DIFFERENCE BETWEEN A CREDIT AND THE CREDIT SCORE?
A credit or credit line refers to your ability to obtain merchandise or any kind of service and loan while deferring payment until a certain point in time. Here, the merchant or lending party trusts that the one applying for credit will indeed make the payment at the scheduled time.
A credit score refers to the numerical equivalent of your credit history. The higher your credit score, the better your reputation would be in terms of your ability to pay monetary debts.
WHAT ARE THE FACTORS THAT CAN AFFECT CREDIT/SCORE?
- The presence of an active Debt Management Plan on your credit report
- The freezing of your bank accounts due to an active DMP.
- Credit history (positive and negative)
- Regular payments to a credit counseling organization
CAN YOU GET CREDIT WHILE ON THE DEBT MANAGEMENT PLAN?
No. You cannot apply for new credit as long as the DMP is active. You may be able to do so after your debt has been paid and the DMP has been removed from the record.
HOW LONG WILL A DEBT MANAGEMENT PLAN STAY ON THE CREDIT REPORT?
It can stay on record for about 6 years. The creditors may put you on default after this due to a reduced debt rate and remove the DMP on record.
WILL YOUR MORTGAGE BE AFFECTED BY YOUR DEBT MANAGEMENT PLAN?
No, it will not.