Credit Counseling / Debt Management

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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.

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Debt Management 101

Find out what credit counseling & debt management plans are all about.

Benefits of Debt Management / Credit Counseling

Credit Counseling, also referred to as a Debt Management Plan, is a program that is best suited for consumers with a moderate debt load that may be having difficulty making their full monthly payments or timely monthly payment on their credit card accounts. A Credit Counseling program may be a good solution for anyone who has experienced a short term financial event, and needs relief from high interest rates in order to get back on track paying their credit card bills.

How Credit Counseling Works

In a certified credit counseling program, you will work with a financial counselor to establish a budget and monthly payment plan and then make one single monthly payment to the credit counseling company who in turn will disburse your payment to your credit card companies.

Credit counseling companies work directly with your creditors to adjust your interest rate and establish a new monthly payment plan to repay the full outstanding balance on your credit card accounts over a period of 5-7 years depending on how much you may owe to your creditors. In a credit counseling program, fees are paid to the credit counseling agency by the credit card companies, and consumers typically pay a small monthly program management fee of $50 or less for administering the program.

Pros and Cons of a Credit Counseling Program

PROS

  • One monthly payment to the credit counseling company.
  • Resolve your debts in 5-7 years.
  • Reducing the interest rates on your cards.

CONS

  • Your credit card accounts will be closed and you will not be able to make future charges on enrolled accounts.
  • You will pay back 100% of your outstanding balances.
  • A Credit Counseling Program requires on-time payments each month.
  • Failure to make on-time payments may result in interest rates being raised again.
  • A Credit Counseling Program typically takes longer to complete than a debt resolution program.

Prioritizing Your Expenses with a Debt Counselor

Examine your expenses, evaluate your income flow, and consider ways to better manage your finances. A debt counselor can illuminate a path that better prioritizes your debt. Some considerations:

  • Housing — whether paying rent or meeting your mortgage, keeping a roof over your head must be your main priority.
  • Transportation — is what gets you to work each day and you need to maintain your transportation to meet your work obligations.
  • Utilities/Food/Medical Bills — are the next critical categories that must be paid with an ever shrinking paycheck.

Budgeting Assistance

“When you fail to plan you plan to fail.” That old adage is particularly apt when it comes to your financial health. The first thing to do when planning for your financial future is to make a budget. For many people however, that’s easier said than done. They struggle with numbers and finances, and they can’t create a plan without help. Fortunately, such help is available in the form of a personal budgeting planner.

A Personal Budgeting Planner 

Sometimes it takes outside assistance to get clarity regarding our total debt picture. Working with a budgeting counselor can give you that clarity. They will work with you to thoroughly understand your total financial picture to include:

  • Assessing your current finances
  • Developing realistic spending plan
  • Establishing realistic financial goals
  • Creating action plan

As with everything in life, follow through is critical when formulating and sticking to a personal budget. Looking at your spending critically allows you the opportunity to assess your expenses before apportioning your income to maintaining your debts. Budgeting for savings means that you will be able to absorb any unexpected expenses without busting your budget.

Am I Eligible for a Debt Management Plan?

In the same manner that bankruptcy petitioners must verify their eligibility to file for protection, debtors looking at entering into a debt management plan must also prove eligibility. 

Once you have decided that you need to get a hold of your outstanding debt, you’ll want to sit down and determine your eligibility to participate. Specifically, we will look at your total debt and income picture to discover whether you have the ability to repay your debts. Towards that end, a credit counselor will analyze:

  • Your total outstanding debt
  • Your income flow
  • Ability of your income to meet the plan’s obligation

If you are sincere in your desire to pay down your debt, and you have a steady income that will allow you to meet the plan’s obligations, then you should be eligible to participate in a DMP.

Do Debt Management Plans Affect Credit?

Once enrolled, you will make your monthly payment to your credit counseling agency, and they will then distribute these funds upwards to your creditors. For many consumers however, they worry about worsening their credit rating by participating in a Debt Management Plan (DMP).

If your question is, “Will a DMP affect my credit”, you should first realize that ongoing credit collection efforts already having a negative effect on your credit. Most Debt Management Plans are scheduled to last three to four years. While in the program, your credit report will note any obligation that is being paid down under the program. While it is impossible to completely assess how a DMP will impact your credit score, the following is information to keep in mind:

  • 35% of your score is based on payment history
  • 30% of your score is based on amounts owed
  • 15% of your score is based on length of credit history
  • 10% of your score is based on new credit inquiries
  • 10% of your score is based on unique individual factors

Testimonials

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Accreditations

  • Receivables Management Association
  • American Fair Credit Concil
  • BBB
  • International Association of Professional Debt Arbitrators

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