Does Debt Management Really Work?

Debt management plans are a type of payment plan that is established and managed by a credit counseling agency. These agencies are usually nonprofit organizations that provide education and assistance to help people better manage their finances. Debt management is the process of managing your debt through an external negotiator, such as a credit counselor. This person or company works with their lenders to negotiate lower interest rates and combine all of their debt payments into one monthly payment.

Typically, these programs are structured to last approximately three to five years with the goal of paying off your debt. Having an entry in your credit history can initially generate red flags, but a debt management plan does not have a lasting negative effect on your credit score. There is no guarantee that a DMP will improve their credit score, but on average, DMP customers see their scores increase by 62 points after two years. This is likely because a DMP makes it easier to stay consistent and reduce your debt quickly, which are important factors in your credit rating. It's also important to consider the commitment involved.

Debt management plans

only work when debtors commit to carrying them out.

If they don't address the underlying issues related to overspending or take the plan seriously, it could end up being a failed effort. Credit counselors will listen to your situation and help you create a personalized plan to get out of debt, and accompany you every step of the journey as a personal money mentor. Before moving forward with a debt management plan, review your options and consider the pros and cons. Now that you and your credit counselor have created an action plan, it's time to pay off your debt. People with consumer debt are twice as likely to lose sleep over their finances compared to those without consumer debt.

Clients also receive ongoing support, including education and debt management counseling, throughout the process. Most debt management programs have credit counselors who work with nonprofit agencies (although there are also some for-profit agencies). It also ensures that you use the advantages of the lower interest rate and the debt management plan for the intended purpose. There are also potential drawbacks to participating in a DMP instead of a different type of consolidation or debt repayment program. When it comes to credit card debt and other unsecured loans, high interest rates can dramatically increase your monthly payments. The debt management company or credit counselor will review your financial situation and then work with the debtor and creditors to create a debt management plan.

With many DMPs, the goal is to have their debts paid in full within three to five years, which is easier to do when less interest accrues each month. The goal is to help you get out of debt in three to five years and get back on track financially without destroying your credit health. While they offer the same services as nonprofit credit counseling agencies that offer debt management plans, their services can have high rates.