Credit card balances, student loans, auto leases and other forms of debt can balloon out of control as a result of a job loss or other big life event that diminishes income. When borrowers are beginning to struggle from month to month, some start exploring their options, such as debt consolidation or bankruptcy. Because these two options are most widely recognized, individuals may overlook another viable solution: debt management programs.
This strategy is a lesser-known method of alleviating debt and paying off balances that is often preferable for consumers who don’t want to further impact their credit scores. Debt management programs are offered by credit counseling agencies, and are formal agreements between a debtor and creditors. Under these programs, participants work with a credit counselor to analyze their finances and determine how much money they can feasibly afford to repay each month while still being able to meet their basic living needs. Once the financial details are determined, borrowers will make a monthly deposit to their credit counseling agency each month, which will then distribute the funds to creditors.
Appeal of debt management plans
Consumers often benefit from debt management programs because they may receive lower interest rates from creditors, and the repayment plan generally spans between three and five years.
Further, because borrowers are repaying their full debt, their credit scores will not be adversely affected. However, consumers should keep in mind that while their score will not go down, it may be challenging to secure credit while undergoing a debt management plan. Though borrowers are still making payments, lenders are likely to view them as a credit risk if they are participating in this program.
Weighing your options
Debt management plans can be useful, but that doesn’t mean they are for everyone. Consumers who are considering these measures should begin by speaking with a credit counselor. A professional may help consumers find areas of their finances to slash and other ways to reduce spending through budgeting. By undertaking these methods, consumers may be able to repay debt without enrolling in a sponsored plan. During the meeting, counselors will help borrowers assess all their expenditures and money management habits to determine if they are a good match or can repay their debts through other measures.