Understanding Debt Management Plans: Pros, Cons, and Limitations
A debt management plan (also called a debt management program or DMP) offers a structured path to debt relief, particularly beneficial for individuals with struggling credit. Overseen by a non-profit credit counseling agency, a DMP consolidates your credit card debt into a single, manageable monthly payment while negotiating with creditors to lower or eliminate interest, penalties, and fees.
While DMPs offer many advantages, there are some drawbacks and limitations that come with it. We’ll explore the pros and cons, helping you make an informed decision about whether a DMP is a good idea for you.
Debt management plan pros
Debt management plans offer many positives. They are a great choice for those with a high amount of unsecured debt (like credit card debt), those with poor credit, and those who are motivated to make significant progress towards becoming debt-free. Here are a few of the main pros of a DMP:
One monthly payment
Instead of juggling multiple payments to different creditors, you make a single, manageable monthly payment to the credit counseling agency, which simplifies your finances. It really takes the stress out of your debt for many people.
Reduced interest rates
Creditors may significantly lower, or even eliminate, interest rates on your credit cards, saving you substantial money over time. Most consumers struggling with credit card debt get stuck making minimum payments that make no difference in the principal amount they owe. It can take half a decade to repay a $1,000 credit card balance while making only minimum payments. Imagine how long that would take if it were $10,000 to $20,000.
Elimination of fees
Late fees, over-limit fees, and other penalties are often waived or eliminated. Fees add up quickly and they have little to do with the original principal of the debt you charged. It’s much easier to focus on paying down your debt when you’re not being penalized.
Improved credit history
Consistent on-time payments can help build positive credit history, improving your credit score. Many potential DMP enrollees get nervous about their credit taking a brief hit for enrolling a Debt Management Program. But it will improve with consistent on time payments. A DMP can have a positive impact on your credit as opposed to bankruptcy, which will cause your credit to suffer for seven to 10 years – or a debt settlement program, which will negatively impact your credit for seven years.
Clear timeline
You get an exact timetable of when you’ll be debt-free. A certified credit counselor will work with you to create a budget and determine a monthly payment that works for you and your financial situation. You will know upfront how long it’ll take to get out of debt if you commit to the program. Many people like knowing there’s a goal and a date they will meet that goal.
Budgeting assistance
You’ll receive budgeting guidance and support, so you can balance your finances and start saving again. Having a budget is the starting point of every financial goal. You’ll need a budget to get out of debt. It’s essentially your map or blueprint to keep your finances in order. Even after you graduate from a debt management program, you can take that budgeting knowledge with you to apply to future financial goals.
Reduced collection calls
The credit counseling agency handles all communication with creditors, eliminating the stress of constant collection calls. Creditors can put unnecessary stress on consumers. Knowing that a credit counseling agency has your back and will end the collection calls is often a sigh of relief for many consumers. There are laws in place like the Fair Debt Collection Practices Act to prevent collector harassment. It does still happen, though. Visit this page if you’re experiencing harassment from a debt collector.
Improve standing
Most creditors will bring past-due accounts current after three program payments, regardless of how far behind you are. This will help you avoid late fees and penalties from the credit card companies. Visit this page where Consolidated Credit answers the question “What’s the fastest way to bring past due accounts current?”
Debt management program cons
There are a few limitations and downsides that come with a DMP. However, most people find these to be manageable. Still, it’s important to understand them before enrolling. The main cons include:
Frozen credit cards
Any credit cards enrolled in the program will be frozen when your program starts, and the accounts will be closed as they get paid off. Creditors want to ensure the lower interest rates they approve are used to pay down debt and not used to make new purchases. It’s important to note, you can keep credit cards while in a DMP, but it isn’t recommended.
Initial credit score impact
Closed credit card accounts can decrease your credit age, which may cause a drop in your credit score if your score was high when you enrolled in the program. However, it’s important for consumers to know as you make payments in the DMP your credit will experience positive impact. Credit utilization is 30% of your credit score, which is the second largest factor. If your credit utilization is already high, then your score is likely suffering before enrolling in a DMP anyway.
Limited credit access
You can’t apply for new credit cards while you’re enrolled in a DMP. This may concern some potential DMP enrollees but it’s the wrong outlook. The main objective of Debt Management Program is to get out of debt. Plain and simple. If you stick to the program, stick to your budget, and make timely payments you will get out of debt. It’s also only an issue with unsecured lines of credit. It’s important to know you can still apply for secured credit, like a mortgage or auto loan.
Not all debts can be included
Secured debts (mortgages/car loans), student loans, or back taxes cannot be included in a DMP. Debt Management Programs are really designed for credit card debt. A credit counseling agency works with creditors to lower the interest rates on your credit cards. Those creditors must actually work with the nonprofit credit counseling agency. Here’s a list of the creditors that Consolidated Credit works with.
Fees
DMPs are usually not free programs and do come with some fees. However, these are usually minimal (the average is around $40 per month and is capped at $79 nationally) and are rolling into your monthly payment. The initial credit counseling session is – and always will be –100% free. Your credit counselor will ensure these costs are affordable within your budget. You’ll know upfront what your payments are before enrollment.
Requires commitment
You must make monthly payments. If you miss payments, you may get dropped from the program. In this case, the creditor has the right to reset those high interest rates and apply new fees to your account if you struggle to keep up with your payments. Any payments made to that point through the DMP will still be credited to your accounts. You will be debt-free if you stick to the program. Find out success stories from Consolidated Credit clients who’ve graduated and are now living debt-free here.
Budget restrictions
You may need to make significant adjustments to your budget to accommodate the DMP payments, which can be challenging for some individuals. Trouble sticking to a budget is a major lifestyle factor in folks who end up needing help from a Debt Management Program. The goal of a DMP isn’t to just get you out of debt and move on. It’s to ensure you don’t end up in credit card debt again. As a nonprofit organization, Consolidated Credit offers free educational resources and workshops to help our clients stay debt-free.
It takes time
A DMP is not a quick fix for your debt. It usually takes between 3-5 years to complete the program. That may sound like a longtime to some potential enrollees. Consider this: Most debt relief solutions take years to complete. Even bankruptcy will impact your credit for seven to 10 years. Getting out of debt takes time and commitment. Over the past three decades, Consolidated Credit has helped more than 10 million and consolidated over $9 billion in debt. Trust the process and you will get the help you need.
While there may be some drawbacks, a debt management plan can be a life saver for many people. It helps get you out of credit card debt and doesn’t hurt your credit score in the long run, in fact it usually has a positive or neutral effect. If you’re seeking debt relief, call Consolidated Credit at (844) 276-1544. One of our certified credit counselors will help you determine if a DMP is right for you or can help you find a solution that works for your unique financial situation.
