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Will a Debt Management Program Help or Hurt Your Credit?

Manage credit card debt

It’s the beginning of a new year, and you’ve decided that it is time to put an end to your problems with debt and time to take control of your financial life. Signing up for credit counseling and enrolling in a debt management program are just two of the ways that you can break free from debt. Learning how to budget and learning to separate what you need from what you want can also help you. You might be concerned that participating in a debt management plan will have a negative impact on your credit score, interfering with your financial life for years to come. Luckily, that’s not the case. When used wisely, a debt management program can help boost your score in the long run and help you take the reins financially.

What’s in Your Score

The Fair Isaac Corporation (FICO), which is one organization that issues credit scores, uses several factors to figure out each person’s score. Some factors carry more weight than others when it comes to scores, such as whether you pay on time and how much you have borrowed compared to how much you can borrow. Other factors impact your score, but to a lesser degree, including how long your credit history is, what types of credit you have, and whether or not any of your accounts are new.

It’s worth noting that FICO doesn’t include a wide range of factors when it determines your score. Perhaps most importantly, whether or not you are enrolled in credit counseling or a debt management program don’t come into play when the organization calculates your score.

DMPs Get You on Track

There is one instance when enrolling in a debt management plan might temporarily decrease your score, and that’s if the credit counseling agency advises you to close an account as you work through the program. Since the length of your credit history and the amount of credit extended to you, compared to the amount you’ve borrowed, affect your score, if you close down a credit card you’ve had for years, it might look as though your history is shorter than it really is and that the amount of your debt is high in comparison to the amount available.

Usually, though, any negative impact on your credit score from closing an account is minimal and brief, especially as you begin to pay off your debts through the program. Using the debt management plan will help improve your payment history and the amount you owe, which have the greatest impact on your score.

If debt is bringing you down, and you’re looking for a way to get back on track this year, it might time to consider a debt management program. When you enroll in a program, you make one monthly payment, which is distributed to all of your creditors. Compared with credit counseling and other financial assistance, participating in a program can be just what you need to finally become debt-free.

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