5 steps to rebuild credit after debt management

One reason some people choose a debt management plan (DMP) over bankruptcy is they want to protect their credit score. The upshot is, a DMP won’t hurt your credit nearly as much as a bankruptcy or debt settlement would as long as you pay your bills on time.

Still, you’ll have some work to do once the DMP is over to get your credit in better shape. That’s because most credit counseling agencies who administer the plans will ask you to close all your credit card accounts. (Some agencies let you keep one credit card open for emergencies, which you should ask about.) As you start closing accounts, your score will go down because the age of your credit history, how much available credit you have (and the types of credit you have) influence your score. 

DMPs also last a long time, potentially as long as  five years, and you have to keep up with your payments, without relying on credit, to ensure your plan isn’t scrapped.

The upside of a DMP is that you don’t have to wait until it’s over to start repairing your credit. That will begin as soon as you start repaying your creditors, says Resolve co-founder Michael Bovee, who has been working in debt resolution for the last 20 years. 

Your credit counselor will be the one responsible for making sure your creditors get their share of your monthly payments, but don’t tune out from the process. The lenders enrolled in the plan  are required to send you monthly billing statements. “Open them, read them, make sure everything is going as planned and there hasn’t been a human error or a computer glitch,” Bovee says. Also monitor your credit report to make sure your debts are being marked as paid. 

Once your DMP is over, you’ll have even more ways to rebuild your credit. Here are five steps you can take to boost your credit score after debt management:

1. Pay your bills on time.

At 35 percent, the biggest slice of your credit score is based on how timely you pay your bills. It’s critical to make your DMP payments and any other bills you have on time. That’s the best and quickest way to rebuild your credit.

2. Get new credit.

There’s a good chance you’ll be left with just one credit card, and possibly none, after your DMP is done. So you’ll need to start building that history back up, especially if you don’t have a mortgage, car loan or student loan you’re paying. It will be nearly impossible to get a new credit card while your DMP is ongoing, Bovee says, so you’ll have to wait until your DMP is over before you apply for a new card or two. 

3. Ask to be an authorized user.

Want to inherit a longstanding, positive credit history almost overnight? Ask a trusted family member or friend to add you as an authorized user on one of their older credit card accounts. Credit history, how far back the account goes, makes up 15 percent of your score. Just remember that this links your credit with the primary card holder’s credit. Choose someone who is responsible with credit and make sure you use that credit card responsibly, too. It is not necessary that you receive a card as an authorized user. Your friend or family member can have that sent to them, and then destroy, or hold on to it.

4. Keep your credit balances low.

At 30 percent, the second biggest factor that makes up your credit score is your credit utilization, which is how much of a balance you’re carrying on your cards compared to your available credit. Paying down your debts through your DMP will improve this portion of your score, and you’ll want to keep it that way. It’s a good idea to keep your credit utilization under 30 percent. If you can pay off your credit card balances in full each month, that’s also a good idea.

5. Take out a small loan.

You may be able to get a mortgage or refinance your home even while you’re still on a DMP, Bovee says. But if you don’t have much credit history or loans left after your DMP is over, consider getting a small loan to improve your credit mix, which accounts for 10 percent of your score. A car loan or a small installment loan might make sense, but only if you can afford the payments and don’t already have other types of loans.

In the long run, a DMP should help improve your credit score. But because a DMP will mean closing so many of your accounts, to rebuild your credit you’ll need to get some new credit and pay your bills on time.