Will a Debt Management Plan Hurt Your Credit Score?

Dear Opening Credits,

I am in a debt management program. I received a letter from one of my creditors. In the letter it states since my account has a paid-in-full status, the following information will be noted on my account "Credit line closed to further purchases." I want to know if that will reflect negatively on my credit report? If it does, is there anything else they can put on my credit report that would be less negative? I'm trying to rebuild my credit.

- Cynthia

Dear Cynthia,

Ah, but you are rebuilding your credit! And I'll prove it.

It all began when you first sought assistance from the credit counseling agency. There you discussed your financial goals, as well as what was holding you back from them. Debt was almost certainly a primary concern and roadblock. You wouldn't have gone on their repayment program if it wasn't.

Now remember what your counselor said about those accounts that you were including on the repayment plan. Not only did he or she tell you that each open line would have to be closed, but it's on the agreement that you signed when you enrolled.

One of your tasks was to call each creditor and inform them that you needed to cancel the account and possibly adjust the due date so they'd receive payments on time. Had you done that, the creditors would have reported to the three major credit reporting bureaus that you, the consumer, closed the credit line.

Even if you didn't contact your creditors, the credit counseling agency would have notified them that the payments would now be coming from the agency, not from you directly. At that point, the creditor would have shut your line down and reported to the bureaus that it closed your account.

The wording you describe is ambiguous, so it's not clear who took that action. But don't worry. While lenders tend to perceive accounts closed by consumers to be more attractive than those closed by creditors, just who takes that action is not included in a FICO credit score or other credit scoring model.

Additionally, the creditor may also have added a notice to the credit reports that you are now paying through a third-party service. Again, that is not factored into a credit score, but it's something that another financial institution may look at and make some kind of assessment about you. It could be good, bad or neutral -- that's the institution's decision.

So what's definitely positive on your credit reports? The same thing that's positive for your budget -- that you're reducing your debt load and establishing a perfect payment pattern.

This is why credit counseling agencies require their clients to suspend borrowing and close active accounts while they are on a repayment plan. Their aim is to get you out of the red and into the black as quickly as possible. Each month that you send the agency a fixed payment and they then distribute it to those you owe, magic happens: Your obligations decrease and payments get to your creditors on time. That causes your credit rating to rise because you're hitting the two most important factors in a credit score: payment history and overall debt.

As far as adding even more excellent data to your credit report so you can increase your rating further and faster, you can do that, but later, when you have open credit cards. At that point you can consistently charge and then repay (but keeping your debt down to zero each month), demonstrating to all that you're a responsible borrower after all!