Credit Counseling / Debt Management

What’s a Credit Counseling Debt Management Plan?

Debt Management Plans, also known as Credit Counseling, can be an effective way to lower your interest rates and combine your monthly unsecured debts into one lower payment. Managing your finances is the first step toward financial security. Before you can start saving, you need to pay off the money you owe, so developing a debt management plan that can help you tackle your consumer debt is an important first step.

How Does a Debt Management Plan Work?

A debt management plan, or DMP, is a payment plan that is created and managed by a consumer credit counseling agency. The agency works with the individual’s creditors to negotiate lower monthly payments and possibly reduce interest rates. In a DMP, you will make one monthly payment to the credit counseling agency, which distributes the funds to your creditors. This plan typically lasts 3-5 years, during which time you are not allowed to take on any new debt. Debt management plans can help you eliminate consumer-related debts faster and cheaper than you otherwise would be able to.

What is a credit counselor?

A credit counselor is a professional trained in financial education and budgeting skills. Credit Counselors provide guidance on managing debt, creating a budget, and improving credit scores. A credit counselor may also work with individuals or creditors to create a debt management plan. Additionally, some credit counseling agencies offer services such as bankruptcy counseling and housing counseling. Remember, it is important to carefully research a reputable credit counseling agency before seeking its services. 

Debt Management Plan Pros and Cons

The most obvious advantage of adopting a debt management plan is that it allows you to lower your interest rate while combining several bills into one. Other benefits of debt management plans include:

• Lower monthly payments and possibly reduced interest rates.
• Having a structured plan to pay off debts in a set time frame (typically 3-5 years).
• Making one monthly payment to the credit counseling agency, rather than multiple payments to individual creditors.
• Potential to improve personal finances

It’s worth calling out that a credit counseling debt management plan is not the best choice for everyone, and should be thoroughly researched before enrolling in one. It is important to ensure that the credit counseling agency you choose is reputable, as fraudulent companies do exist and those companies may charge excessive fees or encourage the individual to make payments directly to them rather than their creditors. Additionally, a DMP may have negative impacts on credit scores and not all creditors may agree to participate. Other cons of choosing a debt management plan include:

• Unable to combine medical, tax, or student loans
• Takes three to five years to complete
• Primarily for credit card debt
• Unable to use credit cards while in the program
• Missing one payment can derail the entire plan

Despite these disadvantages, working with a debt relief company can help you regain your financial footing in the face of steep credit card debt.