DMPs & Credit Scores

Dec 27, 2011 by

I’ve heard people knock Debt Management Plans—or DMPs—on the ground that they reduce credit scores.

As Usual, the Facts Are Illuminating

  • Fair Isaac Corporation, the creator of the popular FICO credit score, says that whether an individual is or is not enrolled in a Debt Management Plan has no affect on the FICO score.
  • Creditors close accounts placed in a DMP program. When closed, any gap between the account’s credit limit and balance collapses to zero. Since one factor considered in the FICO score is the percentage of available credit that’s being used, this collapsing effect can mildly decrease a client’s FICO score when a DMP program begins.

What About Mortgage Lenders?

Credit reports may note that an individual is on a DMP. Some lenders—especially mortgage lenders—who obtain and review credit reports may refuse credit based on participation in a DMP program.

When you end your DMP program, the DMP notations on your credit report should disappear. If it’s likely you will be applying for a mortgage or refinancing while on a DMP, it might be wise to postpone your DMP start-up until the mortgage work is done. Or, even better, it might be wiser—because you’ll qualify for a lower rate and potentially save thousands of dollars—to postpone applying for a mortgage loan until your debts are paid down or off.

DIY?

If you can—and will—pay off your debts efficiently through a do-it-yourself program and avoid any possible hit on your credit score that a DMP program might produce, great! Do it! In my experience, a DMP is the way to go for most people, because DMPs include many benefits a DIY debt pay-off program cannot, and these benefits usually far outweigh any downsides of a DMP.

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