Credit card debt management – How does it work and why it is best for you

What is credit card debt management?

Normally, debt management is an affordable solution to all your debt problems. By using a debt management option you may keep your debts under control. So, credit card debt management normally consists of proper financial planning and a solid budgeting strategy to manage credit card debts.

The purpose of a debt management plan (DMP) is to make you debt-free within a short period, and lowering your interest rate to increase savings. The best thing about a debt management plan is you may walk along on your own or take help from a reputable credit counseling agency to do all the hard work for you. A credit counselor will provide support to you regarding how much you can pay toward your debts. He/she will also negotiate with your creditors and use your funds properly to pay your creditors until all of your bills are paid off.

If you’re struggling with your credit card bills every month, you may get rid of your credit card debt through a debt management plan. A nonprofit credit counseling agency will help you to consolidate your multiple credit card payments into a single payment and lower your interest rates as much as possible. It will also help you to create a structured way to pay off the credit card debt within 3 to 5 years.

How does a debt management plan work?

A DIY debt management method is totally designed for borrowers like you. In this option, you can create a budget for yourself, so that you may pay off your debts and maintain your financial stability. The tools you may need are budget calculators, repayment calculators, and various financial management apps, which may help you to keep yourself on track. If you require, you may negotiate with your creditors and lower your monthly interest payments. Once you manage your debts, you can decide whether or not to keep your accounts open.

If you can not handle your debts on your own, you may get help from a credit counseling agency or a debt management company. Once you decide to choose this option, you should first look out for a non-profit debt management company, accredited by the National Foundation for Credit Counseling.

When you contact an agency for a free credit counseling service, a professional credit counselor will meet you and analyze your financial status deeply. After going through your situation the counselor will discuss several options with you. The counselor will not only create a budgeting strategy for you, but may also suggest you a way out from debts via debt management program.

You have plenty of time to decide. So, you should think about every aspect of the debt management program, before signing up. But, do not take too much time to decide. Once you opt for the debt management program, make sure you get a written agreement from the company.

A debt management program applies only to your unsecured debts, such as credit cards, payday loans, personal loans, and many more. A debt management program can not provide you help towards managing secured debts, such as a mortgage, car loan, or even student loans.

The credit counseling agency will contact each creditor and notify them that from now on they will handle your accounts. The agency will negotiate with all the creditors and ask for lowering interest rates, lowering monthly payments, or stopping late fees by “re-aging” an account.

Once the deal is made, each month you have to pay a certain amount to the credit counseling agency. It will then pay your creditors via online payment services. You will receive your progress report every month from the agency.

Once you enroll in a debt management program, you have to stop using your credit cards until you’re in the program or the account is paid off entirely. Also, do not apply for a new credit card during this program. Once you apply for a new card, a hard inquiry will be added to your credit report. If your existing creditors notice hard inquiries in your credit report, they may think that your financial condition is good now, and that’s why you are looking to open new credit accounts. So, as a result they may withdraw the discount they offered on your debts.

Last but not the least, you might have to pay an enrollment fee against the debt management services you are getting from a credit counseling agency. Apart from that, you may have to pay a nominal monthly fee for each credit account enrolled in the program. But all of those charges are included in the amount you are paying each month to the credit counseling agency or debt management company.

When choosing a debt management program is the best option for you?

  • i. You have a decent income – You may choose a debt management program if you have a decent income, or have multiple income sources to give you financial support.
  • ii. You can afford to pay a certain amount every month – If you have a decent income to afford the monthly payment needed for the program.
  • iii. You want to pay off your debts in full –If you are determined to pay all of your credit card debts and other unsecured debts fully.
  • iv. You may modify your lifestyle to adjust with the budget –You have no issues to make sacrifices to adjust with your new monthly budget.
  • v. You are having issues to manage your multiple credit card bills –vi> You are unable to manage your multiple credit card bills, and also other debts.
  • vi. You can afford to pay professional fees to the debt management company – You happily agree to pay fees against the services provided by the debt management company.

What are the advantages and disadvantages of a debt management plan?

If you look closely, you may find several amazing benefits in a debt management plan that can be beneficial for you.

Advantages of a debt management program (DMP)

a) You need to make one monthly payment

You just have to make a single monthly payment, instead of multiple payments to each of your credit cards. So, managing your overall finances would be quite easier than before.

b) It can manage your payments towards debts

Through a debt management plan, the credit counseling company will handle your monthly payments towards your credit card debts. As a result, you can easily focus on other financial aspects of your life.

c) Protection from collection calls

Once you enroll in a debt management program or DMP, the credit counseling agency will take over all the financial responsibilities related to your credit card debts. So, the collection agencies or creditors probably won’t make further calls to you.

d) Help you to create a suitable budget

If you are getting confused about how to manage your finances while you are in a DMP, then that credit counseling agency will guide you to create a suitable budget that makes room for debt payment and savings every month.

e) No effect on credit score

Apart from being debt-free, your credit score won’t be affected due to debt management, as you are fully paying off your creditors. Your credit score might face a drop initially, once you close paid off accounts. But if you play nicely on your finances, your credit score will definitely rise again.

f) It will provide financial education and support

Credit counseling agencies may offer you workshops and other resources once you enroll in a DMP. The counseling agency or debt management company may also offer you a free counseling session. Through these sessions, you will receive effective personal finance tips to manage and improve your financial situation.

Disadvantages of a debt management program (DMP)

Disadvantages of a debt management plan include:

A) You have to pay debts in full

Of course! This is the major difference between a debt management program and a debt settlement program. In a debt settlement program, you may pay off the debt in a lesser amount compared to what you owe actually. Normally you can save 25% to 40% through debt settlement. But as you are paying less, it will hurt your credit score.

But through a debt management program the credit counseling company will make a payment structure in such a way that with affordable monthly payments, you can easily pay off your entire debt load. As a result, your credit score remains intact.

So, to keep your credit score unharmed, DMP is a good choice.

B) Creditors may reject participation in a DMP

Some of the creditors may reject entering into a debt management plan, and may still go after you to collect their debts.

But, there are rare cases where such problems arise. In most cases, a credit counseling agency will negotiate with the creditors so well that they happily agree to this arrangement.

C) You need to close credit card accounts

In a debt management process, you might have to close your credit card accounts once they are fully paid off. This might affect the credit score because your credit limit will be decreased once you close all those old credit card accounts.

But, it is a nominal issue. With good financial habits and proper budgeting, you can easily improve your credit score very soon. You can also apply for new credit cards once you are out of the debt management program.

D) Secured debts can’t be included in DMP

Mortgages and other ‘secured’ debts aren’t covered by a debt management plan. Practically it is not an issue at all. These secured debts may contain a deposit or collateral, such as your house, car, etc. So, until you pay off the entire loan, you won’t have the ownership completely.

But if you still want to manage such debts, talk directly to the lender, and negotiate. You may even have the option to refinance your house or car loan, simply. So, why worry so much?

E) You may face a debt management scam

Some scam credit counseling agencies can make a fool out of you in the name of debt management. Normally, these scam companies may charge high fees before even starting the process. They may also fail to give you a good deal and lower the interest rate. These scammers may also promise you to save an impossible amount of money through the debt management plan. Last but not the least, they may promise you to provide financial advice and educational services. But at the end of the day, they won’t keep that promise.

But, do not lose hope! Some legit debt management companies can help you to become debt free by managing your debts properly and honestly. These credit counseling companies have a reputation in the market and many consumers have benefitted from their services. So, it is important to check the reviews before enrolling in any program. Positive reviews ensure the authenticity of a debt management company.

A genuine debt management company will provide you with a free counseling session before enrolling in their DMP. They will provide you with all the information before suggesting any step. The agency will determine the exact amount which you may need to give them every month. The credit counseling agency will create a fund or “Trust account”. Your fees will be included in that amount, no up-front charges would be attached. Most importantly, they will sign a written agreement where everything that is provided in the DMP will be included. No information will be exempted from the agreement. So, you are legally secure in every possible way!

How to repay credit card debts through debt management (step-by-step guide)

This is a brief step-by-step guide on how to repay credit card bills via a debt management program.

  • Step – 1. Search for a licensed, trustworthy, and popular credit counseling agency in your state. Make sure you go through all the client reviews and testimonials available on the web.
  • Step – 2. Consult with your credit counselor and get free credit counseling services. During the session, the counselor may pull your credit report and analyze all the information with you. This will be considered as a “soft pull”, so it won’t affect your credit score. The counselor may check your monthly income and expenses before suggesting you a few budgeting tips. Follow those tips and save a good amount of money every month.
  • Step – 3. Gather information about DMP. Know about how much you need to pay monthly and within what time you can expect to become debt free. Find out how much you need to pay as fees and how payments will be paid to creditors. Make sure your personal details are getting protected and get everything in writing. If the credit counseling agency does not entertain any of these things, do nor enroll in the DMP.
  • Step – 4. If everything works perfectly, sign up into the debt management program. The credit counseling company will negotiate with each of your credit card companies and try to reduce the interest rate. They will send proposals to the creditors to get approval or to get a counter-proposal. Also, they will inform you about every progress they make with the credit card companies. Once a deal is made, you will be informed by the agency as you and the creditor both have to agree with all the terms and conditions. After that, you might have to make payment of a certain amount suggested by the credit counselor every month. You might be asked for your bank account information so that monthly payments can be transferred from your account to the credit counseling agency, automatically.
  • The agency will gradually make payments to each credit card account from the fund that they will create from your monthly payments.

  • Step – 5. You will receive monthly statements from both the parties, the creditor and the credit counseling agency. You should compare the two statements and be sure payments are credited as proposed. Once an account is paid off, the agency will inform you about this. Make sure to check your credit report where the creditor should list the account as “Paid in full”.
  • How to find a suitable credit counseling agency?

    As per the information given by the Federal Trade Commission “Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. They discuss your entire financial situation with you, and help you develop a personalized plan to deal with your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

    A reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation. If a firm doesn’t do that, consider it a red flag and go elsewhere for help.”

    To find a popular credit counseling agency in your state, you can search via online, look into local listings, and also consider newspaper advertisements.

    So, while selecting a trustworthy credit counseling agency, you must ask these following questions, as suggested by the consumer.ftc.gov:

    Questions Details
    What services do you offer? Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation.
    Do you offer information? Are educational materials available for free? Avoid organizations that charge for the information.
    In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future? Ask if the agency will help you to prepare a solid budget for your finances after you pay off all the debts.
    What are your fees? Will the organization stop helping me because I can’t afford to pay? If yes, look elsewhere for help.
    What if I can’t afford to pay your fees or make contributions? Is there set-up and/or monthly fees? Get a specific price quote in writing.
    Will I have a formal written agreement or contract with you? Don’t sign anything without reading it first. Make sure all verbal promises are in writing.
    Are you licensed to offer your services in my state? Check out for local credit counselors in local listings and newspapers. Talk to them via phone calls or video chat.
    What are the qualifications of your counselors? Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a non-affiliated party
    What assurance do I have that information about me (including my address, phone number, and financial information) will be kept confidential and secure? Check and verify the privacy policy maintained by the credit counseling agency.
    How are your employees paid? Are they paid more if they make me sign up for a few services? If I pay a fee or make a contribution to the organization, will their salary increase? If the answer is yes, consider it a red flag and go elsewhere for help.

    Data courtesy – consumer.ftc.gov