What Happens to Your Credit Score on a Debt Management Plan?

The short version

Talking with a credit counselor does not, by itself, directly affect your credit scores. Enrolling in a debt management plan (DMP) can, but indirectly: through enrolled cards being closed, through the payment history you build during the plan, and through your balances as you pay them down. Some of those effects can lower a score and others can help it over time.

No one can tell you exactly what your score will do. The result depends on your credit reports, how each creditor reports your accounts, the scoring model used, and whether payments reach your creditors on time.

If you are still deciding whether a plan fits your situation, see Is a debt management plan worth it? Who it fits and who it doesn't. For the step-by-step mechanics, see How does a debt management plan actually work?

What credit counseling alone does to your scores

The National Foundation for Credit Counseling (NFCC) says credit counseling does not have a direct impact on your credit scores. According to the NFCC, your NFCC-certified counselor cannot add or remove information in your credit reports and will not perform a hard inquiry when reviewing your reports with you.

The counseling session is a conversation about your finances, not an event on your credit file. What can affect your credit is what you do afterward: enrolling in a plan, closing accounts, and how you pay.

So if fear of a score drop is what keeps you from talking to a counselor, the conversation itself is not the risk. Ask about any counseling fees before you schedule.

What changes when you enroll in a plan

According to the NFCC, if you enroll in a DMP your credit scores will be indirectly affected. The plan changes how your accounts are handled, and those changes show up in your credit reports. Here are the moving pieces.

Enrolled cards are usually closed. The NFCC says that in most cases you will have to close your credit cards on a DMP. Closing an account does not erase its history. FICO says its scores generally consider the age of both open and closed accounts, and a closed account may keep counting toward your length of credit history for as long as it remains on your credit report. FICO adds that credit bureaus often remove closed accounts in good standing after around 10 years.

Closures can change your utilization. Your credit utilization ratio compares your revolving balances with your credit limits. FICO says closing a card can remove its available credit from your total and raise your utilization, which can lower a score. FICO also says closed revolving accounts that still carry a balance are included in utilization calculations until the balance is reported as $0. How a particular closed account affects your score depends on what is reported and on the scoring model.

Your payment history keeps building. Each month your creditors report whether the account was paid as agreed. If you were missing payments before the plan, on-time plan payments can add positive history going forward. Late payments already on your reports do not disappear because you enrolled. The Consumer Financial Protection Bureau (CFPB) says no one has the right to remove accurate negative information, such as late payments, from a credit report, and that credit reporting companies can generally report negative payment information for up to seven years. FICO says older problems count less than recent ones.

Balances fall as you pay. Plan payments reduce what you owe, so the balances reported on your accounts go down over time. Lower reported revolving balances can help utilization. This tends to happen gradually, because it follows your actual paydown month by month.

Creditors decide how they report. How an enrolled account appears on your reports depends on the creditor. Practices vary, and there is no single notation every creditor uses. Ask about this before you enroll rather than discovering it afterward.

What FICO's percentages mean, and what they don't

FICO groups the information in a credit report into five categories and publishes how important each is for a typical FICO Score: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Utilization is part of amounts owed.

These percentages are general educational information. FICO says they reflect the general population and that the importance of each category may differ for different credit profiles. They are not a formula. You cannot use them to calculate how many points your score will rise or fall on a plan.

Lenders also use different scoring models and versions, which can treat the same report differently.

The short term and the longer term

The NFCC says many clients experience an initial decline in points at the beginning of their DMP. That fits the mechanics above: cards closing, utilization shifting, and any earlier late payments still recent on your reports.

Over a longer period, on-time payments and falling balances can work in your favor, and the NFCC notes that repaying your debt in full and according to plan may help you re-establish credit. But there is no universal schedule of an early dip followed by recovery. Depending on your reports and what happens during the plan, your score may fall, rise, or change very little. A late or missed payment during the plan can hurt.

Average score changes reported for groups of plan clients describe those groups. They cannot predict what will happen to your score, and no specific improvement is guaranteed.

What you control and what you don't

What you control: making each plan deposit on time, checking your statements to confirm the agency's payments reach your creditors as agreed, and avoiding new debt during the plan. The Federal Trade Commission (FTC) notes that you might have to agree not to apply for or use any more credit until the plan is finished.

What you don't control: how each creditor reports your enrolled accounts, which concessions each creditor offers, and how a scoring model weighs your particular file.

Your payment consistency matters, but so do agency processing, creditor acceptance, and timely distribution of your funds. Confirm regularly that payments have posted and that your account status is reported correctly. The CFPB notes that if your credit report contains errors, you can get them fixed on your own at no cost.

What to ask the agency before you enroll

Put credit reporting on the agenda with the counselor before you sign anything. Useful questions:

• How will my enrolled accounts appear on my credit reports while the plan is active? Ask about each creditor, since practices vary.
• Which of my accounts will be closed, and what happens to any accounts that stay open?
• I already have late payments on my reports. Will the plan change how those are reported?
• What happens to my reports if a creditor does not accept the proposed plan for one of my accounts?
• What happens to my accounts and reports if I miss a deposit?
• Can you explain the possible near-term and longer-term credit effects for someone in my situation, without promising a specific score outcome?

Be cautious of any organization that guarantees a score result. The CFPB advises confirming with your creditors directly that they have accepted a proposed plan before you send the agency any payments, and getting a specific fee quote in writing.

About the NFCC and debtself

The National Foundation for Credit Counseling is a nonprofit organization with a network of member agencies. Counseling and debt management plans are provided by the individual member agencies, which review your finances and set up any plan.

debtself is not a credit counseling agency. It does not provide credit counseling or administer debt management plans.