Since March 2022, roughly two in five cardholders have maxed out a credit card or come close. Paying down debt can be challenging, especially with interest rates as high as 20.42% (as of November). Programs like a debt management plan (DMP) can get you on track. But will it hurt your credit?
What is a debt management program?
A debt management plan is a program offered through certified credit counseling agencies. When you enroll, a certified counselor will work with your creditors to reduce your interest rate and consolidate your credit cards into one affordable monthly payment. DMPs are designed so that you can pay off your loans in three to five years. Unlike debt settlement, which may charge you 15%–20% of what you owe, you’ll likely pay around $40 a month for a debt management plan.
Here’s how a debt management plan can impact your credit score:
1. Your score may temporarily go down
When you sign up for a DMP, your creditors may close your credit card accounts, raising your credit utilization ratio. This is the amount of available credit you’re using, which impacts 30% of your score. However, this is only temporary, as paying your debt down will increase your available credit, decrease your utilization, and boost your score.
2. Your payment history will improve
As you make regular payments toward your cards and pay them down, your credit history will also improve, which is 35% of your credit score.
Paying down your cards is what counts
While a notation on your credit report may flag to lenders that your accounts are in credit counseling, there’s no penalty. The most important thing is that through a DMP, you’ll pay your debt off, ultimately boosting your credit score overall with on-time monthly payments.
Start the new year right and pay down your debt
As the shopping season begins, consider enrolling in a debt management program to pay off holiday debt. While buying gifts for loved ones and hosting friends and family is always fun, it costs money, which will only add to debt. By enrolling in a DMP now, you can start the new year on the right foot.
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