Debt Management Plans: Comparing and Contrasting
Debt relief methods can create more problems than solutions, at least in the short-term. Debt settlement can drag on and lead to legal action and debt collectors; debt consolidation can double your debt (even while reducing your monthly payments). But debt management is a simpler solution and one that can be just as effective.
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In this guide, we’ll take a closer look at some popular debt management plans, comparing and contrasting these to find the right one for you, while also providing more information on how these programs work and how much they cost.
What is Debt Management?
A debt management program/plan (DMP) is created to help you clear your debts, often within 3 to 5 years. You pay your money to the agency and they make all the repayments and do all the negotiating on your behalf, giving you lower monthly payments and/or interest rates.
There are some similarities to debt consolidation and the goal is ultimately the same, but there are a few differences:
- A repayment plan is created with input from you and your lender
- A loan (and thus another line of credit) is not required
- A minimum credit score doesn’t factor into the equation
There are some downsides to DMPs. On the one hand, you can cancel at any time because there are no commitments—a cancellation will not impact your credit report like other credit cancellations can. On the other hand, if you miss a single payment, the lender may void the entire agreement, at which point you’ll return to the previously high-interest rate and all the hard work performed on your behalf will be undone.
You will also lose a lot of your current lines of credit. DMPs often require you to close all but one of your credit cards and to only use this card in emergencies. This may not seem like a major issue, but it can impact your credit score by reducing your credit utilization ratio, as discussed in our guide to how credit scores are calculated.
It’s important to weigh up the pros and cons of these programs before diving in. Compare them to debt consolidation, debt settlement, and even bankruptcy to find the right one for you and your situation—these programs are not designed to be one-size-fits-all. If you have any questions, you can address them to your credit counselor directly.
What Credit Score is Needed for Debt Management?
Your credit score is not considered in this process. It’s all about how much you can afford, whether or not you can meet the repayments, and how you can be helped. If the credit counselor finds that you are heavily in debt, with more outgoings than income, they may advise against a DMP and recommend bankruptcy instead.
How Much Does It Cost?
DMPs cost an average of $50 to set up, in addition to a monthly fee based on the size of the debt and the monthly payment. This can change from state to state and debt to debt, but it will be discussed at length during the initial consultation.
How Does it Affect My Credit Score?
You don’t need to open any new accounts, but you will need to close some and this could reduce your credit utilization score, thus reducing your credit score on the whole. Your score will improve once you begin to clear your debts.
How Long Does It Take?
It can take anywhere up to 5 years to complete a debt management program, but it depends on the individual and the type of program being offered. Some last for just 3 years.
How Much Does It Cost to Get Started?
You shouldn’t need to pay anything for your initial consultation. These are provided for free by all debt relief companies and allow you to ask questions, get answers, and make an informed decision. There have been reports of pushy salesmen, but while this is true for debt settlement, the same can’t be said for debt management.
The Best Debt Management Program
Debt management is pretty standard across the industry, certainly more so than any other type of debt relief. We have listed a few major programs and options below, but you’ll notice many similarities across the board. Some of these are restricted to individuals with a lot of debt and no means of repayment, others are limited to debtors within certain states.
- NFCU Debt Management Program: The Navy Federal Credit Union Debt Management Program is offered to individuals struggling with debt. It’s not available to everyone though and you’ll need to be in hardship to qualify.
- CCCS Debt Management Program: Consumer Credit Counseling Services is NFCC-Certified and has been helping Americans deal with debt issues for over 40 years.
- Christian Debt Management Program: Christian DMPs are offered by multiple companies, all abiding by the values of Christianity and predominantly helping Christians. These include Trinity and Christian Credit Counsellors.
- LSS Debt Management Program: The Lutheran Social Services of Minnesota is an accredited, long-standing, and highly-rated credit counseling service.
- Greenpath Debt Management Program: A DMP provider with a great reputation, coverage for all 50 states, and an average interest rate of just 8%. Services can be accessed online and by the phone by all customers, but Greenpath also had locations in 19 states.
- Money Management International Debt Management Program: Also available in all 50 states, this provider charges a low start-up fee of $32 (average) and its average interest rate reduction is 7.5% from 24%.
Summary: Just One Option
A debt management program is just one of the options available to Americans seeking to escape debt. The first option should be to try and budget better and negotiate reduced rates, ensuring you have more disposable income and lower outgoings. If this fails, credit counseling can help, followed by debt management, consolidation, settlement and, ultimately, bankruptcy.
But there is no strict timeline dictating what you need to do at what point; there’s no chart prescribing what action needs to be taken based on how bad your debt is. The good news is that no matter how bad things seem, there is always an escape, a way to drag yourself out of debt and find the light at the end of this very dark tunnel.