Introduction
While trying to deal with various debts, a debt management plan (DMP) can be a ray of hope. Nevertheless, it is essential to know the influence such a plan will have on your credit score. This guide delves into how a DMP affects your credit and outlines effective credit management and risk management techniques to help maintain or improve your credit score during the process.
What is a Debt Management Plan?
A debt management plan is a service usually offered by credit counseling agencies to assist you in paying off your debts within a certain time frame. The agency bargains with your creditors to probably lower the interest rates and monthly payments, thus, your debt becomes more manageable. Although it is a debt consolidation, it is not like the other consolidation options, you do not take a new loan.
The effect of a debt management plan on your credit score.
Initial Impact
If you join a DMP, creditors may put this in your credit report. Though the DMP itself doesn’t make your credit score to decrease, it can make it to fall through the indirect way. The creditors may close or suspend your credit accounts which in turn will influence your credit score by affecting the credit utilization ratio and the age of the credit accounts—both are the main factors in credit scoring.
Benefits to Your Score
A DMP can be the reason for the payment history to be improved in the future. Payment history is the main factor of your credit score and hence, by making on-time payments through a DMP, you can increase your score. To add, the decrease in your total debt over time leads to the drop of your credit utilization ratio, which in turn, boosts your credit score.
Risks to Consider
Not all creditors are willing to join DMPs, this is an essential thing to remember. If a creditor suddenly changes his or her mind and decides not to take part after you’ve already started the plan, missed payments can be a serious factor of credit score decline. Thus, the risk management techniques are of the upmost importance when one is getting into a DMP.
Effective Credit Management Strategies While on a DMP
The regular monitoring of your credit report.
Always monitor your credit report to see if all the payments within your DMP are reported correctly. Hence, you can detect the faults and the errors that would be the reason for your credit score to go down, and this would help you in solving them immediately.
Keep in Touch with Your Credit Counselor for a Better Credit Score.
Keep in touch with your credit counselor and never let the communication channel closed. They can give you some useful tips and changes in your plan if your financial situation changes, thus, the DMP continues to be in line with your financial capabilities and goals.
Avoid Incurring New Debt
During the enrollment in a DMP one should not take on new credit obligations. The new debt can boost your credit utilization percentage and eventually it may cause new financial difficulties which can spoil the effect of your DMP.
Risk Management Techniques to Protect Your Credit
Choose the Right Agency
Choose a reliable credit counseling agency that will tell you all the possible consequences of a DMP on your credit. The option you choose is the most critical factor in the risk management of the DMP entrance.
Strategic Debt Payment
If it is possible, try to pay off the debts that are not part of the DMP, especially those with the high interest rates. This method lessens your total debt and credit utilization which is good for your credit score.
Plan for the Future
Plan for your future financially after the DMP. By the new year long-term financial goals are set and the effective credit management strategies are applied, debts are paid off and you are on the right track for the future.
Conclusion
Although a debt management plan can be a bad thing to your credit score at first, it can be a good thing in the long run if it is managed properly. Through the use of the efficient credit management and risk management methods, you can go through a DMP with the least effect on your credit score and come out financially stronger. Keep in mind that a DMP does not only deal with getting out of debt; it is also about forming a solid platform for the future financial wellness.
