Debt Management Plans: What to Know Before You Sign Up - American Credit Foundation

Debt Management Plans: What to Know Before You Sign Up

what to know about debt management plans

Feeling overwhelmed by credit card debt? Having trouble making your monthly payments? A debt management plan offers a realistic way to pay down your debt and get your finances back on track.

Debt management plans are offered by nonprofit credit counseling organizations, and they typically work like this: Your credit counselor negotiates with your lenders to get a better interest rate, reduced fees, or lower monthly payments, which means that more of your money goes to your balance. Instead of sending monthly payments to your credit card lenders, you send your money to your credit counseling company, who pays your lenders and manages your debt on your behalf.

In some cases, a debt management plan can help you pay down your debt, learn to use credit wisely, and even pave the way to a higher credit score. Of course, debt management plans aren’t for everybody, and there are definitely pros and cons to this option.

Considering a debt management plan? Here are a few things to keep in mind before you make your decision:

  • You aren’t borrowing money. Your credit counselor is simply helping to manage your debt and communicating with your lenders – they’re not giving you a loan. You give a set amount of money to your credit counseling company every month, and they are responsible for distributing that money to your credit card lenders.
  • It’s not a quick fix. While it’s true that a debt management plan can help you become debt-free, this won’t happen overnight. Most people can expect to be debt-free in four to six years after starting a debt management plan.
  • It’s not a free service. When you sign up for a debt management plan, you should expect to pay a monthly fee that can range from around $25 to $75 per month.
  • Even with a fee, you’ll probably save money. Your credit counselor will negotiate with your credit card lender to help lower your monthly payments, waive fees, and secure a lower interest rate. The savings will likely outweigh your monthly fee.
    save money
  • You won’t be able to use your credit cards. When you sign up for a debt management plan, your credit cards will be closed. You won’t be allowed to open new accounts until your debts are paid off.
  • Your credit score might take a hit in the short term. The downside to closing your credit cards is your pool of available credit will shrink drastically. Because available credit is one factor in determining your credit score, your score will probably drop during your first few months on the program. But this isn’t necessarily a deal-breaker because…
  • Your credit score will probably go up in the long term. Yes, your credit score will probably drop after you close out your credit cards – but a debt management plan will also help you ensure that you pay on time and pay off your balance, which can help improve your credit score over time.
  • No more collection calls. Your credit counselor negotiates on your behalf and keeps your credit card lenders informed of your situation, which means your lenders likely won’t need to call you.
  • You can’t miss a payment. Most debt management plans have very strict rules about this – one missed or late payment, and you’re off the plan and back to managing your debt and dealing with creditors on your own. If you have any concerns about making your payments on time, this might not be the best option for you.
  • It’s only for unsecured debt (like credit cards). A debt management plan can’t help with other types of debt, like student loans, auto loans, or mortgages.

Have more questions about debt management plans? Still not sure what repayment option is the best for your situation? The team at American Credit Foundation is always available to answer your questions about debt, credit, and budgeting.