Pros and Cons of Debt Management Programs

Managing personal debt can sometimes become an overwhelming experience. Maybe you have high-interest rates, or you have to handle multiple debts at once.

When all doors close, your last resort is to take the help of a debt management plan.

It can help you pay off your debts without hurting your credit score. Read further to understand what it is and if you need one. 

What are Debt Management Programs?

A debt management program is a service offered by credit counseling agencies and aims to help individuals manage their debts effectively.

These agencies are primarily nonprofit organizations and provide advice and assistance on debt management and consumer credit. A leading example of a nonprofit credit counseling agency is the National Foundation for Credit Counseling (NFCC).

Also called debt management plans or DMPs, these programs last between three to five years. These programs are best for people overburdened with debt and want some relief in interest rates, professional financial advice, or both. 

Although you can talk directly to your creditors about getting relief on your current debts, it is better when a professional does it for you. So that’s where DMPs come in. 

How Debt Management Programs Work

Debt management programs are only available for unsecured debts such as credit cards, personal loans, payday loans, overdrafts, or lines of credit. Here’s how a DMP works:

  • You approach a credit counseling agency and tell them about your current financial situation and debts.
  • The certified credit counselor engages with you in a counseling session and analyzes your income, expenses, debt-to-income ratio, and other financials. Further advising if you need a DMP or not. 
  • Your credit counselor contacts all your creditors and starts negotiations to get them to agree to a debt management plan with lower interest rates and repayment duration. 
  • Once everything is set up, you make one lump-sum monthly payment to your counselor (including their monthly fee). Your counselor then distributes this money among all your creditors. 
  • You stick religiously to your monthly payments, and when your DMP is fully paid, you can close your debt accounts.  

Why Choose a Debt Management Program

The delinquency rate for credit card debts rose from 1.57% in Q4 2021 up to 2.25% in Q4 of 2022, which means that about 43% more of all credit card holders missed their monthly payments compared to the year prior.

Delinquencies rise when borrowers fail to pay their debts. And they do so because they cannot manage their debts effectively. That’s where a DMP is needed. 

A debt management program allows you to reduce your monthly payments with lower interest rates and a guided path to finish your debt payments.

You also get valuable financial advice and expert assistance on money management. Additionally, such programs also protect your credit score and credit history to a significant extent. 

Pro Tip: Always look for certified counseling services or credit counselors to avoid falling for scams.

Pros and Cons of Debt Management Programs

Before you opt for a debt management program, take a look at its pros and cons:

Expedite and Simplify Payments 

A DMP allows you to pay off your debts in 5 years or less to live a debt-free life. You do not have to manage multiple creditors as the counselor manages it with a simple repayment plan requiring just one monthly payment from your side.  

Lower Cost

Your counselor negotiates lower interest rates for the DMP, which reduces your monthly payments. Counseling organizations are usually nonprofit, so you only pay a small monthly fee and minimal charges for these services. 

Good Credit Score and Credit History

Timely debt repayment helps improve your credit score in the long run. It is an agreement between you, the creditor, and the counselor, so there will be no negative legal records on your credit history. Additionally, you will not get any collection calls from debt collectors or credit card companies.

Expert Advice

While you repay your debts over three to five years, you will also learn valuable financial education from experts. Your counselor can offer personal advice or host events like workshops to help you improve your personal finance and related skills. 

No New Credit

You are usually not allowed to apply for new credit card accounts while on a debt management program. Additionally, when you are in a credit counseling or debt management program, it will be listed on your credit report. It may not hurt your score, but most lenders do see this as a red flag and will not lend to you while in one of these programs.

You may even be asked to close your existing credit cards and restricted from opening any new credit lines (personal loans, auto loans, etc.)

Exclusions

DMPs do not cover all types of debt. For example, secured debts, backed by collateral, are not covered under these. The primary focus of these programs is credit cards and personal loans. 

Additionally, there’s a chance that all or some of your creditors may not want to participate in such a program. 

Alternatives to Debt Management Programs

If you do not want to use a DMP or are not eligible for it, here are a few alternatives:

DIY-Debt Management

The simplest method to manage your debt is the DIY approach. You should handle all your finances and make on-time payments to avoid a bad credit score. Check out our quick guide on debt management to learn more. 

Debt Consolidation

You can opt for a debt consolidation loan to combine all your existing debts into one for a single monthly payment.

You must do your due diligence to find the appropriate creditors who offer such loans at reduced interest rates.

Also, remember that your current credit score will affect the rates of interest you are offered.

Balance Transfer

Borrowers with a good credit score can apply for a balance transfer credit card.

These cards allow you to transfer all your unsecured debt on one credit card with a 0% APR, so you can pay your debts interest-free. 

Bankruptcy

You can declare bankruptcy when your debt rises above what you can pay. While it will make all of your debt disappear, the negative impact on your credit report and creditworthiness will stay for another ten years.

Life After Debt Management Programs

Once your debt management program has ended, you can apply for new unsecured debts. While your credit score takes a hit initially, throughout your DMP, your credit score rebuilds with significant progress.

While creditors will see that you took a DMP to manage your debts and use it to assess your creditworthiness, records of DMP can be erased after a few years of program completion. 

If you need guidance about enrollment in a debt management program, connect with us for expert advice on financial matters related to debt and money management.

TurboDebt offers counseling and other debt-relief options to help you choose what’s best for you.