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How Can Debt Management Affect Your Credit Score?

A debt management plan can help you get out of debt quicker, but are there credit ramifications?

Justin Cupler

Contributing Writer at Tally

June 30, 2021

Credit cards are easy to swipe and rack up charges on, but they can become difficult to pay off once you get deep into debt due to their high interest rates and fees. 

Fortunately, if you find yourself struggling with credit card debt, there are plenty of financial tools that can help get you back on track. One such tool is the debt management plan — also referred to as a debt management program. 

Debt management plans can help you get out of debt quicker by reducing monthly payments, lowering your interest rate, eliminating fees and more. While that all sounds great, you're likely wondering if this will hurt your credit score. 

Can debt management affect credit ratings? We'll cover that and more about debt management plans below. 

What is a Debt Management Plan? 

When your debt gets out of control and you need help getting a handle on it, a credit counseling agency can step in with its credit card debt management plan (DMP) and help. Many of these credit counselors are nonprofit, so the fees are usually minimal at most.

A DMP is a form of debt relief but it doesn't immediately free you from debt. Instead, it puts you on a path to becoming debt-free in a short period — typically three to five years — while eliminating as many fees and other charges as possible. 

When you reach out to a credit counselor about a DMP, they will review your debts and determine if the plan is a good fit. The counselor is looking for places to negotiate your unsecured debt — credit cards, personal loans and other debts without collateral attached to them. 

If the credit counselor determines you're a good fit, they'll begin negotiating with your creditors to lower interest rates, waive late payment fees and more. Once they complete the negotiation process, the counselor will set up a payment plan that requires you to make only one monthly payment to the agency. The agency will then distribute the funds to your creditors. 

You'll also have the option to exclude some creditors from the plan. For example, if you have a low-balance credit card that’s in good standing, you can ask the credit counselor to exclude it in the DMP. 

You may want to consider this because credit counselors typically require you to close any credit accounts placed on a debt management program. Keeping one account open will allow you to build your credit score after completing the plan. 

Can Debt Management Affect Credit Ratings?

Contacting a credit counselor or starting a DMP won't have a direct impact on your credit score. That said, there are indirect ways a DMP can affect your credit score, negatively and positively. 

Increased credit utilization ratio

When you enter a DMP, the credit counseling agency will likely require you to close any accounts included in the plan. Closing accounts will reduce your available credit, which will increase your credit utilization ratio — the amount of credit used relative to your credit limits. 

Your credit utilization ratio is a part of the "amounts owed" factor in determining your FICO credit score. The "amounts owed" category accounts for 30% of your credit score, making it the second most important factor after your payment history. 

If your credit utilization gets too high, this could have significant negative impacts on your credit score. Fortunately, as you pay down your DMP, you'll see this ratio drop, which may allow your credit score to rebound. 

Shortened length of credit history

Another determining factor of your FICO credit score that a DMP may impact is your length of credit history. This looks at the average age of your debts and how often you use them. Older accounts that you frequently use have a positive impact. 

However, you may have to close long-standing accounts when you enter a DMP. This could have a negative effect on this category, which accounts for 15% of your FICO credit score. 

Improved payment history

One negotiation tactic credit counselors employ is re-aging past-due accounts, which is when they ask your creditors to bring all your overdue accounts current on your credit report. While this won't eliminate past negative marks for late payments, this will put you on an immediate path to building a positive payment history which in turn can improve your credit score.

Your payment history is critical because it’s the most important part of your FICO credit score, making up 35% of the score.

Paid-in-full accounts

When a credit counselor negotiates with your creditors and lenders, they're not negotiating a debt settlement. Instead, they are negotiating a way for you to pay your account in full by the time the DMP ends. 

A paid-in-full account may have a positive impact on your credit score, while a "settled" mark on your account could have a negative impact. 

What are the Pros of a Debt Management Plan?

A DMP is a great way to work toward becoming debt-free with as little stress as possible. Plus, by working with a credit counselor, you have an accredited professional in managing debt on your side who's seen virtually every credit situation possible. 

Here are some of the key benefits of entering a DMP.

Professional insight

Credit counselors are trained, certified and accredited in managing debt, so their advice is invaluable. Once you enter a DMP, the counselor will use their experience to negotiate with your creditors to get you the best possible repayment plan. If you have any questions or need advice along the way, the counselor is always there to help. 

Reduction of fees and payments

The credit counselor negotiates with your creditors to eliminate or reduce any late fees and other charges on the account, bringing down the total amount you owe. They'll also work to lower your interest rates and monthly payments. This could give you some  wiggle room to focus on other financial needs.

Fewer monthly payments

When you enter a DMP, you make a single payment to the credit counseling agency, and it distributes the payments to the debts you included in the plan. This reduced number of payments streamlines the debt repayment process and can relieve a lot of stress.  

Lower interest rates

Some credit counselors can also negotiate a lower interest rate for you, which can have two positive impacts. First, a reduced interest rate allows a larger portion of your payment to go toward paying off the debt's principal balance, meaning you can pay it off quicker. Second, a lower interest rate means lower interest charges, which can save you money over time. 

Accounts brought current

Part of some DMPs is attempting to get creditors to re-age your overdue accounts, meaning they take them from past due to current without you making any extra monthly payments. If the credit counselor can pull this off, these accounts could immediately start helping you build a good credit score with on-time payments moving forward.

Fewer debt collection calls 

Being in debt is stressful enough, and collection calls on late accounts can compound that. When you enter a DMP, the collection calls should eventually stop. It won't be immediate, as it'll take time for your creditors to update their systems, but they should stop shortly after entering the program. 

The Cons of a Debt Management Plan

A DMP has many great benefits, but they aren't the perfect option. Let's look at some of the downsides to entering a DMP. 

Not all types of debt are eligible

Only unsecured debts — those without collateral — are eligible for a DMP, so you can't include your mortgage, car loan or other secured debts in the plan. Student loans are also not eligible for a DMP. 

Your credit counselor can still evaluate your entire financial situation and give you tips and advice on these accounts. They simply can't include them in the negotiations and repayment processes. 

Fees may apply

Just because most credit counselors are nonprofit doesn't mean they're free. Many National Foundation for Credit Counseling (NFCC) certified credit counseling agencies charge a small setup fee and an ongoing fee that typically ranges between $25 and $60 per month

In some cases, though, you may qualify for fee waivers, so make sure to ask when establishing a DMP. 

Strict credit use rules

Not only will you likely have to close all the credit cards you include in the DMP, but those creditors may also require you to stop using all other credit or applying for new credit during the DMP. If you break these terms, it could void the agreement.

Get Your Finances in Order with a Debt Management Plan

With its numerous benefits, including reduced fees, lower interest rates, reduced payment amounts, streamlined payment terms and more, there are many reasons to consider a DMP. 

Yes, there are downsides, like short-term negative impacts on your credit report, strict limits on credit use and monthly fees, but in many cases the benefits far outweigh the negatives. 

Probably the biggest downside to a DMP is finding out you're not eligible. If this is the case, Tally can help with its credit card management app and line of credit. The Tally line of credit1 offers interest rates as low as 9.9%, which is much lower than most credit cards, and Tally accepts credit scores as low as 660. 

The line of credit is a revolving debt, so you can use it multiple times to pay off all your debts. Plus, like a DMP, you make only one payment to Tally, and it distributes the payment to your credit cards using the debt avalanche method. That way, you can start focusing your energy on a debt-free future.  


1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.