Understand the pros and cons of using a debt management program to get out of credit card debt faster.
How does a debt management program work?
With a debt management program, credit counselors negotiate with your creditors to accept a new payment plan and lower interest rates. Interests range from zero percent up to about eleven percent depending on the creditor.
All of the debts are consolidated into one monthly payment that works with your budget.
The large reduction in interest enables you to pay off the debt faster and more money each month goes towards principal. Most people complete the debt management program in about three to five years.
Enrolling in the program usually doesn’t have any negative impact on your credit score as long as you keep up with the payments. In fact, many people with low credit scores at the start of the program usually see their credit improve by completion. Since your creditors agree to the payment plan, it helps you build a positive credit history as you pay off your debt.
The best way to find out if this solution will work for you is to speak with a certified credit counselor who will evaluate your finances. If a debt management program is your best option, they can help you enroll. Otherwise, they’ll let you know which solution you should pursue.
If you enroll in a debt management program, the credit card accounts you include will be frozen and you will not be able to use those cards. In many cases, you can also include medical debt and payday loans.
Debt management plans are a great way to help your family get out of debt and continue to reach your financial goals.
To get started, simply fill out our form or better yet, call us now, and we’ll match you with the best solution for your situation, for free. We are A- plus rated by the better business bureau and have helped thousands of people become financially stable.
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The facts about debt management programs
|Average time to payoff||36-60 payments|
|Amount of principal repaid||100% (paid in-full)|
|Average negotiated interest rates||0-11%|
|Total credit card payment reduction||30-50%|
|Effect on credit||Generally positive or neutral|
|Works best for||Credit card debt still with the original creditor|
|Other types of debt you can include||Debt collections|
Unsecured personal loans
Credit card debt consolidation loans
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What is a debt management program?
A debt management program is a credit card debt solution that you set up through a consumer credit counseling agency. It essentially offers the benefits of several debt relief programs in one easy solution. It’s a debt consolidation plan and workout arrangement all rolled into one. But it requires professional help to set it up.
With a workout arrangement, you call a particular creditor to set up a repayment plan you can afford. They usually freeze your account as you pay off your debt. But you must set up a workout arrangement with each individual creditor when you do it on your own. By contrast, a debt management program sets up a single repayment plan to cover all your credit card debts.
Debt consolidation combines multiple debts into one payment at the lowest interest rate possible. You reduce or eliminate interest charges, so it’s easier to pay off credit card debt fast. But consolidation usually requires new financing, such as a debt consolidation loan. A debt management program gives you the benefits of consolidation without new financing. You still owe your original creditors, but they agree to reduce or eliminate the APR applied to your debt.
Other names for debt management programs
A debt management program is often shortened to DMP. In some cases, it may also be called a debt management plan – these two terms are interchangeable and refer to the same thing. In some cases, it’s called a debt consolidation program. And in still others, it’s referred to as a debt relief program.
Just be careful on that last one! Debt relief programs can refer to debt management OR debt settlement. Both are relief programs for credit card debt.
Debt management vs debt settlement
A debt management program should not be confused with a debt settlement program – these are two different solutions. With a settlement program, you get out of debt for a percentage of what you owe. This can cause significant damage to your credit score. But a debt management program pays back everything you charged. It just does it in a more efficient way.
The two programs off differ in which types of debts they benefit the most. A debt management program is best used before a debt gets charged off. The debts can be behind or delinquent, as long as they are still with the original creditor. By contrast, a debt settlement program works best for debts after they get charged off and sent to a debt collector. Once a credit card debt passes to collections, monthly interest charges don’t apply. So, there’s less benefit to using a debt management program, because there are no rates to negotiate.
How does a debt management plan work?
- First, you must contact a consumer credit counseling agency for a debt analysis.
- They review your debts, credit, and budget to see if you’re eligible AND to see if there are any better solutions to use in your situation.
- If a DMP is your best option, the credit counselor helps you find a payment that works for your budget.
- Then they call your creditors to negotiate. The goal is to:
- Get your creditors to agree to an adjusted payment schedule.
- Reduce or eliminate interest charges applied to your debt.
- Stop penalties and fees that may be getting added every month if you’re behind on your payments.
- As each creditor agrees to the program, the send you a formal acceptance letter to acknowledge the terms of the arrangement.
- Once all your creditors sign off, your program officially begins.
- You make one payment each month to the credit counseling agency. Then they distribute that payment to your creditors on your behalf.
- Since you still owe your original creditors, you can see your balances decreasing as you progress through the program.
- Once all the balances are paid off the program ends, and the creditors close your accounts. They show up on your credit reports as paid-in-full, so you avoid the seven-year credit penalty that comes with a settlement.
The cost of a debt management program
Consumer credit counseling agencies are 501(c)3 nonprofit organizations. That means they’re not in the business of making money off your financial hardship. Instead, they are largely funded by grants from credit card companies. As a result, the cost of a debt management program is relatively low compared to other solutions, such as debt settlement.
That being said, it still takes money to set up and administer each debt management program. So, you can expect to pay an initial setup and monthly administration fee to run your program. Fees vary by state, but they are capped nationwide at $79. So, that’s the most you can expect to pay, but most people who enroll in the program pay less.
Fees may also be reduced for certain reasons. In cases, of extreme financial hardship, you may pay less. Some credit counseling agencies waive fees for certain people. For instance, you may have lower fees if you’re a military Service Member or Veteran. Some credit counseling agencies reduce fees for people living in a declared disaster area, for things like hurricanes, fires or floods. The idea is that people often take on credit card debt following a natural disaster, so they may face severe financial hardship as they recover.
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Comparing debt management program pros and cons
Breaking down the drawbacks of debt management
Debt.com’s founder, Howard Dvorkin, is a big proponent of debt management programs. Earlier in his career, he founded one of the nation’s first credit counseling agencies. So, he’s a big advocate for how debt management programs can help consumers get out of debt. And he says that many of the cons of debt management programs aren’t really cons. They’re actually beneficial for helping a consumer make a clean break from their credit card debt problems.
“Often people get into serious trouble credit card debt because they’ve become credit dependent,” Dvorkin explains. “You get accustomed to pulling out the plastic anytime you’re short on cash. You come to rely on credit cards to cover monthly expenses and use them anytime you have an emergency. If you don’t break this credit dependence, then it won’t be long before you face credit card debt problems again.”
So, Dvorkin says, it can actually be beneficial that a debt management program basically forces you to quit credit cards cold-turkey. The credit counseling team will help you construct a budget that balances your income and expenses, so you spend less than you earn. It should also build in monthly savings, so you can build up an emergency savings fund. This helps you avoid credit card debt caused by unexpected expenses that inevitably crop up every month.
“And if you’re concerned about quitting credit cards cold-turkey, there are some credit counseling agencies that will allow you to keep one card out for emergencies,” Dvorkin continues. “However, I really recommend including all your cards and having a clean break from credit while you’re enrolled in the program. Then, once you graduate, you can decide if you want to introduce credit cards back into your financial life.”
Ready to get started so you can start enjoying debt relief today? Debt.com can connect you with an accredited credit counseling agency now.
The effects of a debt management program on your credit
In general, the overall effect of completing a debt management program on your credit should be neutral or positive. In other words, at worst, your credit score won’t change. At best, you should see your credit score improve once you complete the program and pay off all your balances in full.
The reason a debt management program is usually good for people’s credit is because it improves the two biggest factors used to credit score calculations – credit history and credit utilization. Since your creditors agree to accept adjusted payments when you enroll in a debt management program, you build positive credit history each time you make a program payment on time. You only damage your credit history if you miss a DMP payment by more than 30 days.
As you pay off your balances, you also gradually your credit utilization ratio. This ratio measures your total current balance versus your total available credit limit. Lower is always better, so as you get closer to 0% utilization, your credit score improves.
Still, there is some potential for credit score damage. If you don’t continue making payments while the credit counseling team negotiates with your creditors, then you hurt your credit history. The enrollment period is the time when DMP clients are the most likely to have problems with their credit history. But as long as you keep up with your minimum payments until your program starts, you shouldn’t have any trouble.
There is also a potential for a slight credit decrease at the end of your debt management program. Closing credit card accounts can hurt your “credit age” – i.e. the length of your credit history. But this is one of the smaller factors in credit scoring, so any decrease is usually nominal.
See the credit score impact of a DMP over the course of the program
Including other types of debt in a DMP
A debt management program can be used for more than just credit card debt. However, it’s usually the most beneficial with credit card debt that’s still with the original creditor. That’s where the program really shines and provides the biggest benefits to users.
By and large, you can use a debt management program to consolidate any unsecured debt, besides student loans. Student loans are a specialized type of credit, so they usually require specialized relief programs. You also can’t use a debt management program for secured debts (those are debt secured with collateral). So, this solution won’t help you with your mortgage or auto loans or any home equity loan or HELOC.
Including credit card debts that have gone to collections in a DMP
As we mentioned above you may be able to include debts that have already passed into collections in a DMP. As long as the debt collector agrees to include their debt in your program, you can absolutely consolidate it with your other credit card debts.
But it’s not as beneficial. By law, debt collectors can’t apply monthly interest charges to credit card debt collection accounts. So, these types of collections don’t have any APR to negotiate. As a result, you lose one of the main benefits of a DMP.
That being said, there is some reason that you may want to include a collection accounts in DMP. One of the secondary benefits of a DMP is that you roll all your debts into a single monthly payment. This simplifies your bill payment schedule, which can significantly reduce financial stress.
Just be aware that this means you would repay the full amount you owe to the collector. With credit card debt settlement, you may be able to get out of debt for less money. But some people prefer to pay back everything they borrowed. It’s really a personal choice, so consider your options carefully.
Medical debts in a DMP
You can also include unpaid medical bills that have gone to collections in a debt management program. But just like with credit card debt collections, you lose many of the benefits of the DMP with medical collections.
First, medical bills have no interest rates applied to them. There may be penalties and late fees applied, but there are never accrued monthly interest charges. So, there’s no interest rate to negotiate down when it comes to medical debt.
Again, debt settlement is often the better way to go with medical debt collection. In many cases, the best option is to talk directly with the original service provider to set up a settlement repayment plan.
Still, if you want to include a single medical debt in a debt management program because most of your debt problems come from credit cards, you can. But you generally can’t use a DMP solely to consolidate medical debt.
Payday loans in a DMP
Payday loans can be a nightmare if you get lured into the payday loan trap. These loans are only meant to be short-term solutions. You get paid on Friday, but your A/C breaks on Monday and you’re short on funds, so you take a payday advance to cover the repair cost until you get paid. Then you repay the payday loan in full within the two-week term.
But people rarely use payday loans the way they’re supposed to be used. If you go over that two-week term, you can face interest rates in the triple digits – as in 300% or higher. They also tack on fees and keep draining funds out of your account. If you use one of these loans when you’re already having problems with credit card debt, it just makes a bad situation worse.
Payday loans can be included in a debt management program if the payday lender agrees to allow you to include them. But a debt management program cannot be used solely to consolidate payday loans. You can only include them along with your credit cards if you have one or two payday loans that are causing you problems.
On the other hand, if most of your debt problems come from payday loans, a debt management program probably isn’t the best solution. You should use debt settlement or setup workout arrangements with individual payday lenders.
Debt consolidation loans in a DMP
Unsecured personal debt consolidation loans for credit card debt can absolutely be included in a debt management program. This is key because if you try to solve your debt problems on your own and fail, you can still get professional help to save your credit.
However, it’s important to note that the personal loan must be unsecured. You can’t include home equity loans or HELOCs in a DMP. So, if you used your equity to pay off your credit cards and then fall behind on the payments, a debt management program can’t help you.
On the other hand, if you get an unsecured personal loan to consolidate debt, but you’re still having problems, you can enroll in a DMP. You can consolidate the debt you already consolidated with any new balances you’ve generated.
It’s important to note that you cannot include debt consolidation loans for student debt, even though they are unsecured. Student loans are a specialized type of debt, so they usually require a specialized solution.
Which of the following borrowers would benefit the most from a debt management program?
a) Someone who owes $6,500 in credit card debt with a FICO score of 800
b) A borrower who owes $15,000 on a debt consolidation loan and $5,000 in credit card debt with a 550 FICO score
c) Someone that owes $25,000 in charged-off credit card debt with a 550 FICO credit score.
d) A borrower that owes $3,000 to creditors, $5,000 in unpaid medical debt and $1,000 in payday loans with a 600 FICO score.
Tip: The second-best candidate for a DMP would be the borrower in Answer D. The borrower in C should use debt settlement and Borrower A should explore do-it-yourself debt relief options.
b) A borrower who owes $15,000 on a debt consolidation loan and $5,000 in credit card debt with a 550 FICO score.
Debt management program FAQ
Q:Can you get student loans when you’re in a debt management program?
In addition, these loans don’t need to be used for your own education. For example, parents who are working through a debt management program can apply for loans to fund their children’s education. Parents can get PLUS loans through the Federal Direct lending program, as well as student loans from private lenders.
Q:Can you get out of a debt management program?
Just be aware that if you leave the program before you pay off your balances, you generally lose the benefits of the DMP. Your creditors will restore your original interest rates and any penalties that they stopped applying when you enrolled. You will return to your original payment schedules and due dates with each individual creditor.
But leaving a DMP isn’t always a bad thing. In many cases, people complete the program early by paying off their remaining balance in a lump sum. For example, you may have one year left on your program, but you decide to pay off the remaining balances with your tax refund. This is absolutely allowable – and, in fact, it’s encouraged!
Still, it’s only advisable to leave a debt management program if you’re close to paying off your debt as described above. If you still have balances to pay down, it’s best to stick it out and stay on the program. Otherwise, you’ll face higher interest charges and overall costs.
Q:Do debt management programs close all accounts?
However, this may not necessarily close all your credit card accounts. Some credit counseling agencies allow you to leave one credit card out of the program in case you have any emergencies. This card stays open and active while you’re enrolled in the program. You pay the bill separately from your debt management program payment. If you keep the card out of the program the entire time you’re enrolled, then the card would still be active when you complete the program.
But any accounts that you include in the program will be closed. This can result in a slight amount of damage to your credit score. However, the slight decrease caused by closing old accounts is usually completely offset by the positive effects on your credit history and credit utilization ratio. Since those are the two biggest credit scoring factors, the overall effect of a debt management program on your credit is generally positive or neutral.
Q:Do debt management programs work?
As we describe above, a debt management program is most likely to be the best solution for a borrower who owes $5,000 or more in credit card debt, if most of their debts are still with the original creditor. If you have medical bills, payday loans, and debt collections, these can also be included. But the program is not as beneficial.
It’s worth noting that only about one out of every twelve borrowers that contact a credit counseling agency end up enrolling in a debt management program. For the others, credit counselors usually recommend alternative solutions, such as consolidation loans or settlement.
Q:Does Capital One participate with debt management programs?
- American Express
- Bank of America
- Capital One
- US Bank
- Wells Fargo
Most major retailers that offer store credit cards also participate in debt management programs. This includes:
- Best Buy
- Home Depot
- JC Penny
- Old Navy
Q:What happens if I am in a debt management program, then declare bankruptcy?
Just keep in mind that if you’re keeping up with your debt management program payments, there’s little reason to declare bankruptcy. You have a repayment plan set up with all your creditors. As long as you stick to the repayment plan, you should be able to get out of debt without damaging your credit score. By contrast, bankruptcy will damage your credit. What’s more, if you file Chapter 13, you’ll still be subject to making monthly payments on the court-ordered repayment plan.
So, unless you see the writing on the wall that you won’t be able to keep up with your payments, stick with your DMP. You’ll face less credit damage and start off in a strong position credit-wise once you’ve finished paying off your debt.
Q:What if I can’t pay my debt management program?
Even if you are going to be more than 30 days late, they may still be able to help you stay enrolled. They will need to contact your creditors to make sure they’re willing to let you stay in the program. As long as your creditors agree, then you can continue making payments on your DMP.
What you don’t want to do is treat your credit counseling team like debt collectors and start dodging their calls. If they don’t hear from you and you haven’t made a payment, they can’t tell your creditors anything useful. Your creditors will assume you dropped out and the credit counselors won’t be able to tell them anything to the contrary. It’s more likely that you won’t be allowed to continue the program.
Always remember that consumer credit counselors are there to be your ally and your advocate. They’re there to help you make arrangements if you’re struggling to keep up with your payments. But they can only work with you if you’re willing to talk to them.
Don’t waste another sleepless night worrying about your credit card debt. Talk to a certified credit counselor to find the right solution for your situation today.
Article last modified on December 18, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Using a Debt Management Program - AMP.