Debt Management Plans Rarely Useful as Credit Repair Tool


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If you're deeply in debt, many credit counseling agencies can assume responsibility for repaying your debts and negotiating better rates and reduced fees with your creditors. Reputable agencies only offer these debt management plans as a “weapon of last resort” if your debt is becoming unmanageable.

Although debt management plans can help you get out of debt in a set period of time, they rarely help you repair your credit.

For starters, credit counselors aren’t in business to improve your credit. The best credit counselors will help educate you to manage your money, pay off your debts and develop a realistic working budget that you can live off of. However, if you opt for a debt management plan your credit score could be reduced.

With a debt management plan, you agree to pay a credit counseling agency a lump sum of money every month for a set period of time, often 4 years or longer. The agency takes over payment to your creditors, allocating a percentage of your monthly payment to each of them. Your creditors will individually have the option of approving or rejecting the plan.

Before each of your creditors approves any debt management plan that may be created on your behalf you'll need to continue paying your minimum monthly payment on your own. Any creditors that don’t agree to the plan will have to be paid by you, separate from your monthly credit counseling agency payment.

If they approve the plan, your creditors may list your participation in a debt management plan on your credit report and could even report negative payment information while you participate in the plan. Many creditors will report positive payment information as long as they're paid according to the terms of the plan.

Your credit score will go down if the agency doesn’t make your minimum required payment with each creditor or is late making a payment. You're still considered fully responsible for making your required payments each month, even if you’re working with a credit counseling agency.

Reputable credit counseling agencies will be willing to provide you with up-to-date statements of all payments made to each of your creditors. Verify this information with each of your monthly statements you receive from your creditors to ensure your debt is being paid in a timely manner. If the agency you are working with claims that certain creditors have agreed to reduce your interest rate, waive late fees or reduce other charges, you will want to verify this information as well.

If you successfully complete a credit counseling debt management plan your finances will likely improve but you may be surprised to find out that your credit score has not went up significantly, if at all. Only time can improve your credit rating in many cases. Any missed payments or late payments, loans in default or other negative financial information often stays on credit reports for 7 years.

Debt management plans may make a good start on the sometimes long and winding road towards credit repair, even though they usually do very little to improve your credit score in the short term.

John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.


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