Using a Debt Management Program

A DMP could help you get out of debt faster, even though you may pay less each month.

High interest rate credit cards have a way of trapping people in a constant cycle of debt. You diligently make payments every month, but you never seem to get any closer to zero. If this sounds familiar, a debt management program could be the solution you need to pay off your balances. In the right circumstances, it can help you save money and become debt-free faster, all while avoiding the credit damage of other solutions, such as debt settlement and bankruptcy. Here’s what you need to know.

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This estimate compares paying your credit card debt on your own vs. the potential benefit of using a Debt Management Plan through completion. IT'S NOT AN ACTUAL QUOTE. Estimate is based on 2.1% of your balance owed. Actual interest rates will vary by consumer and creditor – yours could be higher or lower. Consolidated Credit might be able to reduce your interest rates and late fees allowing you to pay off your credit card debt quicker (since more payments are applied to your principal balances, saving you lots of money in the long run). To complete the program, you must make on-time payments each month. Late or missed payments may cause your program to be cancelled and in that event, this estimate would not apply to you.

What is a debt management program?

A debt management program or plan (also called a DMP) is a repayment plan designed to help you eliminate high interest rate credit card debt. You enroll in the program through a credit counseling agency that helps you find a monthly payment that works for your budget. It’s not a loan – just a better, more efficient way to pay off your credit cards and other unsecured debts. Think of it like a professionally-assisted consolidation and repayment plan.

How debt management plans work

What is a debt management program?

  1. Before you start the process to enroll in a DMP, you go through free credit counseling to make sure it’s the right fit.
  2. A certified credit counselor reviews your debts, credit and budget to answer two key questions:
    1. Are you eligible for the program?
    2. Do you have any better options for relief?
  3. If a DMP is the best choice for your unique financial situation, the counselor works with you to find a monthly payment that will fit your budget.
    1. Fees are included in the monthly payment, so you don’t need to worry about an extra bill. Click here for more details about plan fees.
  4. Then the credit counseling team contacts each of your creditors to negotiate three things:
    1. To get your creditors to accept payments through the program
    2. Reduce or eliminate the interest charges on your accounts
    3. Stop future penalties and penalty fees.
  5. Once all your creditors agree, your program officially starts.
  6. You make one payment to the credit counseling agency and they distribute the funds to your credit on your behalf.

What types of debt can I include in a debt management program?

Credit cards

A DMP is primarily designed to help you find relief from credit card debt. This includes:

  • General purpose credit cards, like Capital One and Chase
  • Charge cards, such as American Express
  • Store credit cards, such as Amazon, Lowe’s and Macy’s

See the full list of over 6000 creditors that Consolidated Credit works with »

Unsecured debts

You can also include most other types of unsecured debt, including:

  • Personal loans
  • Consolidation loans
  • In-store credit lines for furniture and electronics

You cannot include student loans or any secured loans, such as a mortgage or auto loan. In some cases, you may be able to include payday loans. However, this is contingent on whether the payday lender agrees to allow you to include their account in the program.

Collection accounts

You may also be able to include collection accounts for unpaid medical bills, service contracts and utilities. However, these types of accounts do not have interest charges, so you lose one of the primary benefits of enrolling. However, if you simply want to get all your collection accounts paid and roll them into the program, the counseling team can contact the collectors to see if those debts can be included.

What happens to your credit card accounts during enrollment?

While you’re enrolled in a DMP, your creditors will close your accounts, so you will no longer be able to use them. You also can’t apply for new credit cards during your enrollment. However, your counselor will help you work out a budget, so it should be easier to live credit-free.

 What happens if you decide to leave the program?

Enrollment in a debt management plan is entirely voluntary. You can leave the program at any time without any penalties. Your accounts will be credited for all payments made during the program. However, your creditors will mostly like restore the original rates and fees that were applied to your account prior to enrollment.

Understanding the credit impact of the program

How the plan will affect your credit report

A debt management program generally has a positive or neutral effect on people’s credit scores.

  • There is no negative information that your creditors will report to the credit bureaus when you enroll or graduate from the program.
  • All of your credit cards will be listed as paid as agreed in your credit report, which is the status you want them to have.
  • In addition, each payment you make on your DMP will build a positive payment history for those accounts.

So, from a credit report standpoint, a debt management plan will have an overall positive effect on your credit history. This gives DMPs an advantage over debt settlement programs, which cause a 7-year credit penalty for every debt you settle.

How a debt management plan effects your credit score

There are some minor ways that the program can ding your credit score. Once you complete the program and the credit card companies close your accounts, this can cause a slight drop in your credit score for two reasons:

  1. It decreases the number of active accounts you have open, which is a minor scoring factor.
  2. If you close your oldest accounts, this can decrease your “credit age,” which is another minor scoring factor.

Credit age and types of accounts collectively account for 25% of the “weight” in calculating your credit score. By contrast, credit history accounts for 35% alone. This is why a DMP is usually positive for most people’s credit. They build positive credit history and that generally outweighs any slight point drop from closing some accounts.

However, if your credit score is extremely high when you enroll, you may see a slight decrease. If you have excellent credit, make sure you talk to your credit counselor about how the plan may impact you. There may be other solutions, such as debt consolidation loans, that you can use that would be a better fit.

Comparing debt management program pros and cons

Every debt relief solution has its upsides and downsides. The best solution for one person may not fit the needs and goals of another. So, deciding if a debt management program is the right solution really depends on goals.

Here are some real numbers for how Consolidated Credit’s program benefits people who enroll:

  1. Clients see their total credit card payments reduced by up to 30-50%
  2. Negotiated interest rates average between 0% and 11%
  3. Most clients complete the program within 36 to 60 payments.
Pros Cons
You pay back everything you charged Accounts included in the program will be closed when you graduate
A DMP reduces or eliminates interest charges You can’t open new credit card accounts while you’re enrolled
It also stops future penalties and fees  DMPs take longer and cost more than debt settlement
A DMP usually has a positive or neutral impact on your credit

We also have case studies showing how a debt management plan has helped clients who enrolled. You can see how much they saved per month, as well as the time and total money saved on interest charges.

Written by :
April Lewis-Parks [email protected] Director of Education and Corporate Communications
Meghan Alard [email protected] Financial Literacy Specialist