Is a debt management program right for me?

Do you feel like your monthly debt payments aren’t making a dent? Debt management programs offer a structured way to lower your monthly payment and put you on track toward debt payoff. However, they aren’t your only option for getting out of debt.

Here’s what we’re going to cover:

• What is a debt management plan?
• Pros and cons of a debt management program
• How can a debt management program impact my credit?
• Is a debt management plan right for me?
• Alternatives to debt management plans
• Oportun: Affordable lending options designed with you in mind

What is a debt management plan?

A debt management plan, also called a debt management program or DMP, is a structured strategy offered by credit counseling agencies to help you pay down outstanding debts without getting a new loan. The agency gathers information about your debts and lenders, then negotiates with lenders on your behalf to create a payment plan that reduces your interest rates and combines your debts for easier management. In many cases, credit counseling agencies aim to create plans that eliminate all your debt within three to five years.

Credit counseling vs debt settlement agencies

This article focuses on the services offered by credit counseling agencies, which are usually nonprofit organizations that educate consumers on managing money and debts. Under a debt management plan, you make a single payment to the agency each month. The agency then makes monthly payments to your creditors. A credit counseling agency will not advise you to stop paying your debt.

Credit counseling agencies can sometimes be confused with debt settlement companies (DSC’s), but there are several important differences. DSC’s are usually for-profit companies. Typically, they offer to pay off your debts using a lump sum payment to each creditor, but first you have to save up enough money before the DSC will make payments to your creditors. DSC’s may not be able to negotiate better terms with your creditors than you could yourself. They often instruct you to stop paying your creditors until you reach a settlement with them, even though that can result in additional late fees and interest on top of your debt, further harming your credit.

Pros and cons of a debt management program

There are several noteworthy advantages and disadvantages to consider when exploring a debt management plan, including:

Pro: Can lower your interest rates

One of the biggest advantages of a debt management program is the opportunity to lower your interest rate. A lower interest rate saves you money overall and reduces your monthly payment, helping free up space in your budget. Debt management plans could also help you waive fees or charges for late payments, saving you more money.

Pro: Consolidates debt

Debt management programs consolidate your debts into a single monthly payment, that you pay to the credit counseling agency. The agency then makes monthly payments to your creditors. This makes managing your payments easier since you only deal with one creditor and one monthly payment. You also reduce the risk of accidentally overlooking a payment coming due, helping to avoid late fees and penalty interest.

Pro: Receive professional advice

Credit counseling agencies meet with you to discuss your finances before negotiating a debt payment plan. They help you understand your financial story and offer tips and advice before negotiating with your creditors. They’re also available for guidance once the plan has started. You can ask your counselor for help with budgeting, managing your debts, and planning for future financial goals. Some also hold or can direct you to workshops and other educational materials about personal finances. These, alongside a debt management plan, can boost your confidence in managing your money and moving forward.

Pro: Get a concrete timeline

Credit counselors typically negotiate three to five-year terms for debt management plans. Having a fixed term length and end date gives you a clear goal to strive for, removing much of the uncertainty that credit card debt can bring. Seeing progress toward your payoff date with each payment can also be incredibly motivating.

Pro: Improve your credit score

Combining debts and obtaining a lower interest rate may positively impact several credit score factors, such as your total outstanding debt. Furthermore, your score increases as you make timely payments, which are easier to manage under a debt management plan. However, remember that if credit cards are closed as part of the program, your score may dip.

Con: You can perform many of the same services for yourself

You can negotiate with your creditors directly. Talk to customer service and explain your financial situation and your commitment to repaying the debt. Lenders and creditors want to be repaid and are often willing to refinance, reduce debt, extend repayment terms, and engage in other strategies to help their customers get back on track with payments.

Con: Only some debts are eligible

In general, only unsecured debt, such as credit cards or personal loans, is eligible for debt management plans. Secured loans, which require collateral, usually don’t qualify. That means loans such as auto loans and mortgages won’t likely be eligible. Student loans, while typically are unsecured, may not be eligible either.

Con: Can take a long time

Although debt management plans offer a clear path to paying off your debts, finishing the plan can take several years. Therefore, debt management programs make sense if you’re eager to commit to a longer-term but stable way to reduce your debt.

Con: You’ll need to pay fees

Credit counseling agencies charge fees for debt management plans, even if you work with a not-for-profit agency, to sustain their operations. For example, the agency might charge an enrollment or setup fee to start the plan and monthly maintenance fees to maintain it. Depending on where you live, you might qualify for a fee waiver if you meet income requirements.

Con: Some creditors may not participate

Credit counselors can’t guarantee that every debt will be included in the debt management program. Ultimately, each creditor must agree to the plan’s terms. If the counseling agency and creditor can’t reach an agreement, you may still have to deal with that debt. However, it may be easier to manage if your counseling agency successfully negotiates other debts into a plan.

Con: You may see credit restrictions

Credit counseling agencies typically make their clients close the credit cards in the plan, pause all credit card use, and don’t let them open new credit cards as part of a debt management program. This may be inconvenient, but using credit cards while participating in a debt management plan can make sticking to the plan more difficult and increase the number of debts to juggle.

How can a debt management plan impact my credit?

Debt management plans may hurt your credit initially, but if you are successful at reducing your debt, your credit score may go up in the long term. Here’s how one of these programs could impact your score:

• Initial score drop: Enrolling in a debt management plan can cause your score to decrease initially. So if you do not complete your debt management plan, your credit score may end up in a worse position than if you had not enrolled.
• Reduced credit utilization: Reducing your credit utilization—your credit balances compared to your limits—can boost your score. This effect can increase as you pay down your debts.
• Longer-term positive payment history: A debt management plan can help you establish a long history of on-time payments, which can boost your score significantly.
• Fewer late payments: Having fewer payments makes it easier to track your debts, which may reduce the chance of late payments that could hurt your score.
• Limited access to new credit: The counseling agency might not let you open new cards or use existing ones. While inconvenient, this may preserve your score by avoiding hard inquiries and lowering your credit utilization.
• Accounts paid in full: A debt management plan may help you pay your accounts in full, minimizing the impact on your credit score. In terms of your credit score, this is better than settling debts which tends to hurt a score more.

Is a debt management plan right for me?

When exploring if a debt management program is right for you, consider the following factors:

• Debt type: If most of your debt is unsecured, such as loans and credit cards, you’ll likely qualify for a debt management plan.
• Total debt amount: If you have significant debt but still think you could pay it off in full if you had some assistance, a debt management plan might be worth exploring.
• Restrictions: If you prefer to avoid new credit cards and use your current ones, a debt management plan could work.
• Current financial circumstances: Debt management plans require monthly payments over several years. Getting on a program may help if you have a lot of debt, a stable income, and a willingness to pay the credit counseling agency for their assistance.

Alternatives to debt management plans

Debt management plans aren’t viable or desirable for everyone. You can also consider these alternative options:

• Getting a debt consolidation loan: A debt consolidation loan pays off multiple debts to combine them into one, making it easier to manage. You may also be able to get a lower interest rate, which can save you money and reduce your monthly payment.
• Using the debt avalanche method: The debt avalanche method pays off your debts from highest to lowest interest rate, saving substantially on interest. When you pay off a debt, you can roll your savings into the next one.
• Using the debt snowball method: The debt snowball method pays off debts from smallest to largest balance. You won’t save as much on interest but gain more momentum since you pay off the first debt faster.
• Opening a balance transfer credit card: Balance transfer credit cards offer 0% APR on balance transfers for a long period, such as 12 to 21 months. If most of your debt is on credit cards, a balance transfer credit card could help. Avoid using it for purchases.
• Budget reassessment: Before pursuing any of these options, review your budget and see if you can temporarily reduce any expenses. For example, canceling subscription services or reducing discretionary costs. You can always spend more in these areas after paying down your debts.

Oportun: Affordable lending options designed with you in mind

Now that you understand how debt management plans work, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about:

• Personal loans
• Credit cards
• Secured personal loans
• And more!

 

Sources

Experian. Is a Debt Management Plan Right for You?

Investopedia. Debt Management Plans: Everything You Need to Know

Debt.org. Debt Management Plan: Pros, Cons and FAQs

Experian. Can Your Lender Reject Your Debt Management Plan?

Forbes. What Is a Balance Transfer APR?