If you’re struggling to pay off your balances, one option is to work with a nonprofit credit counseling agency and enroll in a debt management plan. With this approach, you can pay off your debts in five years or less and get other help managing your money. However, debt management is not a one size fits all solution. The decision to enter into a debt management program depends on many factors unique to your financial situation.
When does debt management make sense?
Here’s what you need to know.
What is Debt Management?
Debt management is a type of credit counseling that consolidates your monthly unsecured debts – like credit card bills, medical bills, and personal loans – into one single payment. A debt management program typically lasts 3-5 years, and at the end of the program, you should be debt-free.
There are two types of debt management organizations: for-profit and nonprofit. For-profit companies typically charge higher fees than nonprofit companies, but both types of debt management companies will work with you to create a personalized payment plan based on your budget and financial goals.
Benefits of a Debt Management Plan
There are several benefits of enrolling in a debt management plan, including:
Lower Interest Rates: One of the biggest advantages of a debt management program is that your interest rates may be lowered. This can save you hundreds or even thousands of dollars over the life of your program. In some cases, your interest rates may be reduced to 0%.
One Monthly Payment: Another benefit of debt management is that you’ll only have to make one monthly payment to the credit counseling agency instead of multiple payments to each creditor. The credit counseling agency will then distribute the payments to your creditors on your behalf. This can make it much easier to stay on top of your debts and budget for your monthly expenses.
Get Out of Debt Faster: Thanks to the lower interest rates and one monthly payment, you may be able to pay off your debts faster than if you were making minimum payments. In some cases, you can be debt-free in as little as three years.
Disadvantages of a Debt Management Plan
There are also some disadvantages of enrolling in a debt management program that you should consider before making a decision. These include:
You May Have to Close Your Accounts: When you’re enrolled in a debt management program, your credit counselor will likely require you to close your credit card accounts. This is done in order to prevent you from using your credit cards and running up more debt. While this may be difficult at first, it’s important to remember that closing your accounts is only temporary. Once you finish your program, you can re-open your accounts and begin using credit responsibly again.
Your Credit Score May Suffer: Enrolling in a debt management program will likely have a negative impact on your credit score. This is because the program will appear on your credit report as a “debt management plan.” You can learn more about this online. However, as you make on-time payments and improve your financial situation, your credit score should begin to improve.
There You Have It
Before enrolling in a debt management program, it’s important to weigh the pros and cons to decide if it’s the right choice for you. When does debt management make sense? If you’re struggling to make ends meet and are ready to get out of debt, a debt management program may be a good solution.
