Is a debt management plan right for you?

If you’re struggling with debt, particularly credit card debt, it can seem like an almost
impossible hurdle to get over on your path to better financial habits. Continue reading to learn more about debt management plans

Whether you ended up in debt due to discretionary or impulsive spending, an emergency situation, or because someone once led you to believe that it was a good idea to carry some credit card debt (it’s not, by the way, but that myth is still pretty pervasive), doesn’t really matter. Once credit card debt is there, its high interest rates can often make it feel like paying it off is an impossible task.

While there are a lot of strategies out there to tackle credit card debt, this post specifically examines the debt management plan as an option for tackling your debt. Good debt management plans are offered by non-profit credit counseling agencies, and are designed to negotiate lower interest-rates on credit cards and/or personal loans to create a single fixed payment plan with the goal of eliminating this type of debt in 3-5 years.

As part of the plan, you’ll work with a credit counselor to develop a detailed budget that factors in what you can afford to pay monthly on your debt. This will then be shared with your credit card companies, who have to approve the plan before you can start. Once the plan is approved, you’ll make payments to the credit counseling organization, who will pay off your cards per the plan.

An important component of this plan is that it’s not a new loan. You haven’t taken out another loan to pay off your debt, the credit counseling agency is just a middle-person between you and your credit card companies in terms of both negotiating lower interest rates on your behalf and distributing your single payment to payoff multiple loans.

How will a debt management plan impact my credit score?

Without getting too much into the weeds of your credit score, a debt management plan will likely have both positive and negative impacts on your credit score initially, but the overall long-term impact if you follow through with the plan will likely be a positive one.

And, in terms of other debt relief options, like debt settlement, bankruptcy, or taking out another loan to pay off credit card debt, this option is typically going to be the best long- term option for your credit score.

For more information about the specifics of how debt management might impact your credit score, I encourage you to check out this article about the pros and cons.

Can I still use my credit cards while on a debt management plan?

While on a debt management plan, you’ll typically be required to close all credit cards and may not be able to qualify for new loans or lines of credit (it will depend on the exact terms of your plan).

While this can seem intimidating, in my opinion, it’s a huge positive of a debt management plan for folks who are struggling to curb their own credit card spending and who need a way to resist the temptation of financing new purchases. The truth is, if you’re in a situation where you’ve run up credit card debt and you can’t afford something without taking on more debt, then you likely just can’t afford it. Period. A debt-management plan will make this non-negotiable. You won’t have to decide anymore.

Planning

How do I get on a debt management plan?

A good place to start is to find a well-rated non-profit credit counseling agency to work with. Nerd Wallet maintains an updated list of recommended, non-profit providers. Stay away from for-profit companies who offer this service, as their fees can often be excessive.

To start the process of seeing whether a debt management plan is right for you, you can fill out the contact form that they have. At that point, you’ll typically meet with a credit counselor and from there, they’ll be able to work with you to determine whether you are a good candidate for this process. Though this won’t be the right fit for everyone, there is simply no harm in applying if you think it might be the right course of action for you. The process of applying will not impact your credit score at all, and even if you apply and are approved, you still have the final say about whether to enroll in the plan.

Participating in a debt management plan may have a few small administrative fees attached (typically a one-time setup fee and small monthly maintenance fee), but for lower-income participants these may be waived. If you find yourself meeting with an organization that requires an application fee, membership fee, upfront fee or per-creditor fee, this is typically a red-flag. You’re most likely at a for-profit agency, and I recommend going back to the list above and choosing to start with an agency on that list.

If I’m approved, what happens next?

If you are approved and do enroll, make it a priority to complete the plan. Make your payments to the credit counseling agency on time, and don’t overspend your budget. 55-70% of folks who start debt management plans see them through to completion.

As part of your budget, work to put some money away each month for unexpected expenses so you’ll have options besides credit cards if an unexpected expense comes up. Be open to suggestions that the credit counselor makes about budgeting. And remember it will likely be impossible to do this if you’re not willing to make some adjustments in your monthly spending.

Understand that this will not be an easy process, but if you’re going to get your financial life in order, tackling credit card debt and paying it off COMPLETELY, is an essential first step.