Carrying thousands of dollars in credit card debt has become the norm for most American households. If you’re struggling to keep up with monthly bills and make scores of payments each month, it’s time to consider debt management.
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Will A Debt Management Plan Help You Get Out of Debt?
Debt management sounds pretty easy. It’s simply a way to use budgeting and planning to get your spending under control.
It’s obviously harder than it sounds, given Americans’ rising debt totals.
According to the Federal Reserve, credit card balances increased by $61 billion in the final quarter of 2022 to hit $986 billion.
A Debt Management Plan can help you fix issues with overspending and track where your money goes each month. A credit counseling agency usually creates them, but creating one on your own is possible.
Pro tip: Sometimes, it helps to consult with a credit counselor because they will offer a realistic view of your spending. The consultation is usually free, and it can be a big help to have a neutral observer review your financial situation. You may not necessarily need to pay for a Debt Management Plan.
How Debt Management Plans Work
Debt Management Plans will only be effective for clients with significant credit card debt. (They will not work for most personal loans, medical bills or student loans.)
DMPs are set up and monitored by credit counselors. Sometimes these counselors work for credit counseling agencies and sometimes they’re independent. Sometimes the agencies are nonprofit organizations, and sometimes they’re for-profit agencies. The type you choose may affect the fee structure.
A DMP will work best for anyone with a large amount of credit card debt who is disciplined enough to take advice from a credit counselor and also work independently to improve their spending habits and boost their credit score.
|Main benefits||Main drawbacks|
|It will save you money due to lower interest rates||DMPs only work with credit card debt, so they won’t help if you have personal loans, debt consolidation loans or debts that are already in collections.|
|You will become debt-free without needing a new loan or taking on additional debt||If your debt is already delinquent, it will be disqualified from the DMP.|
|Fixed program length ranging from three to five years||Your credit will be frozen for three to five years, which will make it impossible to open new lines of credit|
|Prevents filing for bankruptcy||It will be on the public record on your credit report and could affect your ability to get new credit or rent an apartment.|
|Collection calls will usually stop once creditors are aware that you’re on a DMP||DMPs have a setup fee and then a monthly fee that ranges from $25 to $75 per month.|
|No more late fees||It could end up costing more than other debt management methods.|
|May help you build money management skills||It could take up to five years to complete the program.|
|Can bring any late accounts back to current (this is known as re-aging.)||Your credit card accounts will be closed as they’re paid off.|
|Your credit counselor will make your payments||You will repay the full amount you owe, plus monthly fees and interest|
10-Step Guide to Debt Management Plans
If you’re considering a Debt Management Plan, it’s important that you understand the process. Here are the steps to follow.
- Step 1: Research credit counseling agencies. Find one that gets positive reviews. Look for one that’s nonprofit and accredited by the National Foundation for Credit Counseling.
- Step 2: List your monthly income and expenses. Compile paystubs, bills and bank statements. Keep that on hand when you call the credit counselor.
- Step 3: Set up your consultation with a credit counselor. Most credit counseling agencies offer a free financial counseling session. During this consultation, you will carefully review your financial situation with the credit counselor, who will offer advice.
- Step 4: Your credit counselor will pull your credit report and review this information. This will be a “soft pull,” so it won’t affect your credit score.
- Step 5: The credit counselor will evaluate your cash flow situation and probably suggest ways to cut expenses and increase income.
Pro tip: At this point, they will determine whether a Debt Management Plan is right for you.
- Step 6: If you agree to enroll, a credit counselor will develop a budget proposal that’s submitted to the credit card companies. The counselor will negotiate with creditors to lower interest rates or fees and create a repayment plan.
- Step 7: If the credit card companies don’t agree with the proposal, they may offer a counter-proposal, which you will need to review
- Step 8: You and your creditor must agree on terms that include monthly payments, fees and a payment schedule, and you will sign paperwork before the program begins.
- Step 9: Your credit counseling agency and creditors will send you monthly statements, which you’ll need to compare.
- Step 10: As each debt is paid off, your monthly payment remains the same, with the extra money split among your remaining creditors.
Through this plan, you will repay the full total of your debts. However, the credit counselor will contact your lenders to try to negotiate lower interest rates, reduced monthly payments or waived fees. They will then set up a repayment plan based on the new rates. The plan usually takes anywhere from three to five years to complete, depending on complexity and the total debt you have.
READ MORE: Debt management vs. debt settlement
Your Credit Will Be Frozen and Your Credit Card Accounts Will Be Closed
Your credit will be frozen while you’re enrolled in a DMP, so you won’t be able to borrow money for any reason, including home or car purchases.
Depending on your financial situation, your credit card companies will likely close your accounts, affecting your credit score and preventing you from racking up the balances on those credit cards once more. You may be allowed to keep one open to use in an emergency.
Pro tip: Look for a certified credit counselor or credit counseling organization that’s accredited by the National Foundation for Credit Counseling (NFCC).
Will You Have the Discipline to Complete the Plan?
DMPs aren’t a surefire way to become debt-free. Between 55% and 70% of people who enroll in DMPs successfully complete the program. Success usually hinges on interest rates. The lower the interest rate, the higher the odds of successfully completing a program.
Many customers who drop out do it because the budgetary constraints are too severe or they face an unexpected expense after starting a program.
READ MORE: How much credit card debt is too much?
What You Need to Know about Credit Counseling
The U.S. saw its first credit card in 1949 when the Diner’s Club card was introduced. It took another few years for the mainstream banks to enter the industry, and as they did, problems with overspending started to increase
This led to the formation of the credit counseling industry in the mid-1960s to try to reduce the number of credit cardholders who defaulted on their debts or filed for bankruptcy.
As more people started missing payments, the country’s leading creditors joined forces to establish the National Foundation for Credit Counseling (NFCC).
Pro tip: This means credit counseling was created by the very same credit card companies you’re struggling to repay.
The group’s mission was to teach financial education and help prevent customers from filing for bankruptcy. The benefit here was two-fold: Consumers got free advice, and credit card companies got paid (if a customer files for bankruptcy instead, the credit card companies get nothing.
Many credit counseling agencies are nonprofit because the major credit card companies subsidize them. This means the service provider you’re paying may not always act in your best interest.
Credit counseling agencies draw a fair amount of criticism, particularly due to potentially predatory practices that are seen as taking advantage of struggling consumers.
- Charging unreasonable fees
- Failing to meet required standards
- Failing to provide affordable solutions
- Neglecting to inform customers of other debt services elsewhere
- Ambiguous qualification standards
It’s hard to tell how much education is required to become a Certified Credit Counselor. Some programs say having a Bachelor’s degree and completing a certification program is best, but the degree isn’t necessary. Theoretically, your credit counselor could be someone whose only qualification was completing an online program and passing a certification exam.
Pro tip: If you choose a Debt Management Program, ask your credit counselor about his or her credentials. You want to ensure you’re working with someone who will advocate for you rather than the credit card companies.
READ MORE: How credit counseling works
Will a Debt Management Plan Impact My Credit Score?
Though meeting with a credit counselor won’t affect credit score in any way, the Debt Management Plan may have some impact.
Enrolling in a DMP will appear in your credit history, which could lower your credit scores or cause difficulties in other areas. For example, prospective landlords and employers would see the notation.
Be wary of credit counselors who try pushing you into a DMP as your only option before they have information about your financial situation. While DMPs may be helpful for some consumers, they aren’t right for everyone and you shouldn’t feel pressured by your counselor to sign up for one if you don’t feel it’s right for you.
Pro tip: There are a number of debt relief resources you can use, including repayment calculators, free budgeting tools and budgeting software. You can even call your creditors and offer a settlement on your own.
Watch Out for Scammers
There are many debt management scams. The Federal Trade Commission offers some warning signs and legal requirements for legitimate debt management companies at FTC.gov.
The FTC suggests focusing on certified credit counselors who specialize in debt management. Be sure to check any company with the Better Business Bureau, local consumer protection agencies your state attorney general’s office in case there are pending complaints.
READ MORE: Legitimate debt relief companies
Other Debt Relief Options
A professional Debt Management Plan may not be the best choice for you, but that doesn’t mean you’re out of options. There are a few other debt relief methods to consider.
DIY Debt Management Plans
There’s nothing about a Debt Management Plan you can’t do alone. If you contact your creditors, many may be willing to negotiate lower interest rates directly with you. You can also create a budget and set up a payment plan. This isn’t particularly time-consuming and will save you the monthly fees you’d have to pay the credit counselor. However, must have the discipline to make your debt payments on time as agreed. Otherwise, the credit card company will increase your rate again.
A debt settlement company could also be an excellent way to resolve your debts.
This involves hiring a third-party company that will contact your creditors and make offers to “settle” your debts for an amount that’s less than the total you owe. In exchange, they will charge a fee that ranges between 15% to 27% of the total enrolled debt.
This may seem like a lot. However, many debt settlement companies will help you deal with debt collection agencies once you’ve enrolled in a program. Also, debt settlement could save you a lot of money if all goes well. In fact, according to the American Fair Credit Council, debt settlement provides an average of $2.64 in consumer savings for each $1 fee assessed.
Pro tip: To be eligible for debt settlement you’ll need to have a minimum of around $7,500 in unsecured debt or $1,000 in payday loan debt.
READ MORE: How debt settlement works
If your credit score is good enough, apply for a debt consolidation loan with a lower interest rate than what you’re currently paying, and use that loan to pay off your current debts. This leaves you with one monthly payment. It works best, though, for people who qualify a loan with a lower interest rate than what they’re currently paying their credit card companies. Alternatively, you can also try consolidating debts with a balance transfer credit card.
READ MORE: Step-by-step guide to debt consolidation
Is a Debt Management Plan Right for You?
DMPs can sometimes be a useful tool, but they may not solve all your problems, particularly if you have a lot of secured debt (like mortgages or car loans.) Here are the signs a Debt Management Plan could be your best option.
- Have multiple credit card debts
- You want to repay the full amount of what you owe
- You don’t have enough debt to be eligible for debt settlement
- Your credit cards are maxed out and you can only afford to make the minimum payments
- You have a steady income
- You don’t expect to need any new credit or loans
- You don’t mind closing your existing accounts
- You lack the discipline needed for DIY debt consolidation
The Bottom Line
If you’re overwhelmed and unable to pay the bills each month, a Debt Management Plan could offer a lifeline. Whether you can do it yourself or need professional help depends on your own strengths and weaknesses, the type of unsecured debts you have, your total debts and your financial situation.
These won’t be the best option for everyone.
The current balance refers to the total amount you owe on your credit card at a given time, including both purchases and any outstanding balances or fees. It represents the full amount you would need to pay to bring your credit card account up to date.
Available credit is the portion of your credit limit that you have not yet utilized. It is the amount of credit you can still spend or borrow without exceeding your credit limit. Available credit decreases as you make purchases or take cash advances, and it increases as you make payments and reduce your balance.
Yes! You shouldn’t rule out debt consolidation if you have bad credit. It can be a much better debt relief option if you qualify than a Debt Management Plan. Some lenders have less stringent lending requirements and low or no minimum credit scores. Some of the top options include Upstart and Upgrade, among others.
The NFCC is a nonprofit organization that provides financial counseling services, Debt Management Plans, and educational resources to help consumers with credit and debt issues. If you’re looking for a credit counselor, seek out one who works for a credit counseling agency that the NFCC accredits. If you contact the NFCC directly, you will be matched with certified credit counselors in your area.