A debt management plan lowers your interest rate, sets up a three- to five-year payback schedule, and consolidates many credit card obligations into a single payment.
A debt management plan offered by a nonprofit credit counseling organization may be the solution you require if you are struggling to make your monthly credit card payments.
A debt management plan can help you pay off credit card debt while saving money on interest and has less of an impact on your credit score than other debt payback options like bankruptcy or debt settlement.
What is a debt management plan?
One kind of financial product that credit counseling organizations offer is a debt management plan, which can assist you in repaying unsecured debts such as personal loans and credit cards. Student loan debt and secured debts like mortgages and auto loans are not covered.
A debt management plan lowers your interest rates, combines all of your debt payments into one payment, and provides you with a planned repayment schedule that spans three to five years.
How does a debt management plan work?
A credit counselor will get in touch with each creditor to inform them of your debt management plan and designate itself as the payer on your account after you sign up for one. Each creditor may be asked to make concessions by the counselor, such as lowering interest rates, requiring monthly payments, or not charging late fees.
The counseling organization will receive your monthly payment electronically and use it to settle your debts on your behalf.
Each credit account under the plan will probably have a monthly fee in addition to the sign-up fee. Although fees differ from agency to agency, they usually fall between $25 and $40. Your total monthly cost should be less, even with fees.
Any enrolled credit accounts must be closed as part of the debt management plan; however, you might be able to keep one open for unforeseen costs. While you are engaged in the plan, you will not be allowed to open new lines of credit.
Where to get a debt management plan
Credit counseling organizations offer debt management programs. Seek out a nonprofit organization that has National Foundation for Credit Counseling accreditation.
A credit counselor will examine your financial status in detail and go over several options with you, not simply a debt management plan. Do not feel compelled to enroll in a program on the same day it is offered. Think about it for a while.
Is a debt management plan right for you?
If you have excessive credit card debt and your debt-to-income ratio is 43% or more, debt management is most effective. Before choosing to sign up, examine the benefits and drawbacks of debt management programs.
Pros of debt management plans
- Saves on interest: A credit counselor will try to negotiate lower interest rates as part of your enrollment in the debt management plan. Less interest means it’ll be easier for you to pay down debt, since more money will go to the principal.Â
- Simplifies debt: Instead of juggling multiple due dates per month, you’ll have only one monthly payment with a debt management plan.
- Gives you a plan: Credit card debt can feel overwhelming, but a debt management plan gives you structure. If you make all payments on time, you know you’ll be out of debt when the program ends.
- Reduces temptation: Having to live without credit cards — and not being able to apply for new credit — might be an advantage if you struggle with overspending.
Cons of debt management plans
- Requires multi-year commitment:Â A three- to five-year commitment is a long time to keep up with your monthly payment. Before enrolling, make sure you can commit to the payment amount for the duration of the plan.Â
- Limits access to credit:Â Having little to no access to credit cards for up to five years, as well as not being able to open new lines of credit, may be anxiety-inducing for some borrowers.
How does a debt management plan affect your credit?
Because you have less available credit after accounts are closed, your credit score may initially decline. Although signing up for a debt management plan will appear on your credit report, it should have no bearing on your credit score.
Long term, as you get a handle on your finances, your credit score is likely to climb.
Alternatives to using a debt management plan
When debt appears overwhelming, a debt management plan is just one option for debt relief, and it might not be the best choice for you. Examine other options besides debt management programs.
Debt consolidation loans
A debt consolidation loan is a kind of personal loan in which you pay off all of your bills at once and then pay it back over a predetermined period, often one to seven years, at a fixed interest rate. If you can qualify for a lower rate than the average rate for all of your current debts, these loans are a viable option. Credit unions and online lenders offer debt consolidation loans for those with weak credit.
Debt settlement
The process of working with a third party, such as a debt settlement company, to negotiate your debts down to a smaller amount than you owe is known as debt settlement. Only think about debt settlement after you have exhausted all other options for paying off your debt, because it can negatively impact your credit score and is not always successful.
If your debt surpasses 40% of your income and you do not have a plan to pay it off within five years, bankruptcy can be an option. Before thinking about this alternative, consult a bankruptcy lawyer (consultations are typically free).
Bankruptcy
If your debt surpasses 40% of your income and you do not have a plan to pay it off within five years, bankruptcy can be an option. Before thinking about this alternative, consult a bankruptcy lawyer (consultations are typically free).
