A nonprofit credit counseling organization’s debt management plan may be able to help you if you’re having difficulties paying your credit card payments on time each month.
The plan combines all of your credit card payments into a single one, can reduce your interest rates in half, and provides you with a well-organized way to pay off the debt over the course of three to five years.
A debt management plan has a far smaller impact on your credit score than a debt settlement or bankruptcy because you repay your initial amount.
How a debt management plan works
Who Offers Them?
According to John Halkins, senior investment advisor at Retirement Expert, “Credit counseling organizations provide debt management plans. If you’re considering taking this path, search for a nonprofit organization with National Foundation for Credit Counseling accreditation.”
He adds, “A credit counselor should thoroughly review your financial status and go through all of your options, not simply a debt management plan. Do not feel compelled to enrol in any programme on the first day it is offered. Spend some time considering it.”
Debts that aren’t secured, including credit card and personal loan balances. Secured debts are excluded, including those for vehicles and homes. Student loans are not either.
What’s the agency responsible for?
Each creditor will be contacted by the counselor to inform them of the debt management plan and designate the counselor as the payer on your account. In order to stop late fines, the counselor may ask each creditor for concessions, such as lower interest rates, smaller monthly payments, or “re-aging” an account.
Your payment will be sent online each month to the counseling center, which will then pay your creditors. Every month, you receive a progress report.
Each credit account in the plan will probably have a monthly fee in addition to an enrollment fee. (Even with those, your monthly cost overall ought to be less.) Depending on state laws, costs can change, but generally speaking, agencies charge $20 to $30.
What should you expect while on the plan?
Steven Holmes, an Investment Expert from iCash tells us, “Be ready to go without a credit card for the duration of the programme. The majority of credit card companies demand that an account that enrolls in a debt management plan be canceled. However, when you join up, make sure to inquire whether you can keep a card for business or emergencies.”
“Additionally, refrain from taking on any new debt for the length of the plan. Any new commitments will appear on your credit report, and your creditors may decide to revoke their concessions.”
Holmes concludes, “You should make an effort to pay the bills on time each time. Your creditors have made some significant concessions, and they usually expect you to abide by their rules. After one missed payment, they might stop waiving fees and lowering the interest rate.”
When do debt management strategies work the best?
The benefits are as follows if you’re battling with revolving debt:
- a solitary, smaller payment.
- No more phone calls from creditors or debt collectors, or at least fewer. (Find out more advice on how to handle debt collectors.)
- the capacity to eventually get rid of debt.
It’s probably not right for you if:
- You are having problems making payments on loans that are secured, such a mortgage or auto loan.
- Your income hardly provides for basic expenses like utilities and food.
- You intend to keep using your credit cards.
If you struggle with money management, having to live without credit cards or new credit might be advantageous.
Marc Uhlmann, the CEO of Nimbo mentions, “You’ll need to make sure there is money in your budget to do so because you must commit to making payments over a long period of time. Unexpected costs will arise over the years you pay for the plan, so having access to an emergency fund is essential.”
“It’s even feasible that all you require to catch up is financial coaching on its own. In order to avoid falling behind again, it’s a good idea to receive assistance with budgeting and money management if you decide a debt management plan is the correct choice for you.”
Is it right for you?
According to Alex Alexakis, the CEO of Pixel Chefs, “When debt appears unmanageable, a debt management plan is simply one debt relief option, and it might not be the best one for you.”
“Initially, as accounts are closed and you have less credit available, your credit score could decline. Although your enrollment in a debt management programme will be reflected on your credit report, credit scoring is expected to interpret it as neutral. In the long run, as you gain control over your finances, your credit score is probably going to rise.”
Although there is a lack of data, what is known indicates that at least 50% of clients fail to fulfill their goals. We advise you to request data on the completion rates at your counseling agency.
You can use these agency reviews to get a good feel before you make the call:
- American Consumer Credit Counseling
- Cambridge Credit Counseling
- Consumer Education Services Inc.
- GreenPath Financial Wellness
- Money Management International