Life After a Debt Management Program: Rebuilding Credit and Moving Forward

Written by:
Director of Education and Corporate Communications

Completing a debt management program (DMP) is a major accomplishment. You’ve overcome a significant financial challenge and deserve to celebrate. Now that you’ve successfully eliminated credit card debt, it’s time to focus on your financial future. You want to ensure you don’t backslide into bad habits that may have gotten you into debt and safeguard yourself for tough times.

We’ll look at a few practical steps you can take to rebuild and maintain financial health. It may take some discipline, but you’ve just come through a DMP – you can handle it.

Rework your budget

Now that you no longer have that DMP payment every month, you’ll probably have a good chunk of change to add to your monthly budget. You’ll want to use this newfound financial flexibility wisely and re-evaluate your financial priorities. Here are a few good ways to put that extra money in your budget to good use:

Pay off other debts

A debt management program can’t include secured debts like auto loans and mortgages. Student loans are often also excluded from a DMP. However, you may still have outstanding balances on those debt types.

Once you’ve completed a DMP, you’ll no longer need to make that monthly payment. You can use the freed-up money in your budget towards your debts that didn’t qualify for the DMP. You already have momentum from completing the program. Paying more towards other debts will help you become truly debt-free sooner.

Build a safety net

Do you have an emergency savings fund? If not, this is a good time to start one.

Many people end up in credit card debt due to unexpected events like medical expenses, car problems, or a job loss. Having a separate fund for these unforeseen circumstances protects you from going into debt again and peace of mind for the future.

Most financial professionals recommend having at least three to six months of savings to cover all living expenses in your fund. A good rule of thumb to building an emergency fund is to start with a savings goal of $1000, then add 10% of each paycheck towards the fund.

Give yourself some leniency

If you’ve been living on a tight, bare-bones budget during your DMP, you may now have the flexibility to gradually increase your spending in areas like entertainment, dining out, or personal hobbies. This is a well-deserved reward for your hard work and dedication.

Remember, increasing spending responsibly is important so you don’t get into debt again. Create a budget that allows for some extra spending while still maintaining financial stability. Celebrate your success, but do so mindfully.

Rebuild your credit

A DMP is not directly reported to the credit bureaus, so it doesn’t cause a black mark on your credit report. In fact, for many people, completing a DMP positively affects their credit because they’ve been making consistent on-time payments, and their credit utilization has decreased.

However, you may still have poor credit due to the circumstances that necessitated a DMP in the first place, such as high credit card balances and potential late payments. So, while you can apply for new credit after completing the DMP, you may encounter challenges such as high interest rates or credit card denials.

Rebuilding credit takes time. Unfortunately, there isn’t a quick fix. The time frame varies depending on your individual circumstances and the severity of your previous credit issues. It can take months – sometimes years – to improve your credit score significantly. It’s important to take proactive steps to improve your credit score. Here are a few things you can do:

Continue to make on-time payments

Pay all bills on time, including rent, utilities, and other credit accounts. Each on-time payment demonstrates responsible financial behavior and creates a positive credit history. Consistent on-time payments help offset past negative credit activity and gradually improve your credit score.

Keep your credit utilization low

Credit utilization refers to the amount of credit you use compared to your total available credit. Aim to keep your credit utilization below 30% on each card and ideally below 10% overall. This shows lenders you’re a responsible borrower. Divide your current credit card balance by your available credit limit to calculate utilization.

Monitor your credit

Review your credit report to verify that all accounts included in the DMP are closed and marked as ‘paid in full.’ Ensure no fraudulent accounts have been opened in your name and that all your personal information is accurate and up-to-date. If you find any errors or discrepancies, file a dispute immediately. For information on how to dispute mistakes on your credit report, click here

Open a secured credit card

Secured credit cards require a security deposit that acts as your credit limit. To effectively build credit with a secured card, make small, manageable monthly charges you can comfortably repay. Consistent on-time payments demonstrate responsible credit use and contribute positively to your credit history. You can gradually improve your credit score and demonstrate creditworthiness by consistently making on-time payments and maintaining a zero balance.

Take out a credit builder loan

Credit builder loans are a unique type of loan where you deposit money into a savings account, and the lender reports your on-time payments to the credit bureaus. This helps establish a positive payment history, and you’ll have savings. It’s a win-win.

Avoid actions that might damage your credit

While taking steps to build a positive credit history, you also want to avoid actions that may have a negative impact on your score. This includes staying current on all financial obligations (any payments more than 30 days late get reported to the credit bureaus).

Also, avoid applying for numerous lines of credit within a short period, as hard inquiries on your credit can make your score drop. Additionally, refrain from closing old credit accounts you may still have since the length of your credit history is a factor in your credit score, and closing older accounts can shorten your average credit age.

Set new goals

You’ve just accomplished one major goal: paying off your credit card debt. Now, it’s time to set new financial goals to work towards. This could be savings for a downpayment on a house or car, building up your savings, increasing contributions to a college or retirement fund, or saving for a vacation. Here are a few ways to support these new goals:

  • Define a SMART Goal: SMART is an acronym for specific, measurable, attainable, relevant, and time-bound. For example, instead of “Save more money,” set a goal like “Save $5,000 for a down payment within 18 months.”
  • Budget: Adjust your spending plan to allocate funds towards your savings targets.
  • Regularly Review: Keep tabs on where you are in your goal and adjust it as needed. Life circumstances change, and your financial goals should evolve accordingly.

By setting and pursuing new financial goals, you can continue to build on your success.

Stay focused on a debt-free lifestyle

Completing a debt management plan is a big deal. You’ve shown incredible dedication and resilience in achieving your goal. Don’t rest on your laurels! Keep your financial future in focus and continue building on the progress you’ve made. You may face challenges, but remember your past success – you’ve already overcome a major hurdle. Celebrate your successes, stay motivated, and stick to your financial plan. Congratulations on this huge milestone!