Debt management can be a great way to avoid potential negative consequences if you're at risk of falling behind on payments. Late or missed debt payments can result in late fees, which can add up quickly. They can also cause damage to your credit rating, making it difficult to get approved for new loans or lines of credit. People who are struggling with their bills may find that a debt management plan (DMP) offers a sense of relief and a practical solution. In particular, if you feel overwhelmed or are making monthly payments and the balance never seems to go down, a DMP can put you on the path of paying off your debts.
Debt management is a way to keep your debt under control through financial planning and budgeting. The goal of a debt management plan is to use these strategies to help you reduce your current debt and move toward eliminating it. The idea of having an entry in your credit history can initially be intimidating. But while a debt management plan has an effect on your credit history, it doesn't have a lasting negative effect on your credit score. Another 30% of your FICO score is determined by the amount of your total debt.
The fact that the DMP takes you out of debt in three or five years will eventually have a positive effect on your credit. When you successfully exit the DMP free of your unsecured debt, your credit score can go up 100 points or more. Debt consolidation combines multiple debts into a single new account. Money from a consolidation loan or balance transfer is used to pay off the balances in your existing accounts, and instead of making multiple payments each month, you only make one monthly payment to repay the new account. By obtaining a DMP, you may be able to lower your interest rates and monthly payments, allowing you to pay off your debts and avoid the negative impact of defaulting or filing for bankruptcy. Credit counseling agencies offer many services free of charge, but if you enroll in a debt management plan, it may include an initial fee and a monthly fee.
You also have the option of hiring a debt relief company to help you resolve your outstanding unsecured debts. Contact your bank and stop payments to the agency serving your debt management program as soon as you know that the agency has closed. Managing debts can be daunting, and finding a solution to get rid of them is often even more difficult. If you have a stable income that you can use to pay off your unsecured debt at a lower interest rate than you currently pay, and if you can survive without needing new lines of credit throughout the plan, then a debt management plan might work for you. Consolidate unsecured debt and try to reduce monthly payments through reductions in interest rates and penalties. Some options, such as credit counseling, debt settlement and debt forgiveness, carry a high risk of scams.
If you work with a credit counselor, one of the solutions they may suggest is a debt management plan or DMP. Many credit counseling agencies are nonprofit organizations that offer education and assistance to help people better manage their finances. Creditors often make interest rate concessions in debt management plans, often lowering them from 30% to close to 9%, but they rarely waive all interest charges. If you or a third party negotiates with your creditors and agrees to settle your debt for less than you owe, the amount you save is likely to be considered taxable income. You can save some money with a debt settlement, but the fact that you haven't fulfilled your entire obligation will negatively affect your credit rating. Because you repay your original debt, managing a debt plan has a much smaller effect on your credit score than debt settlement or bankruptcy. Fortunately, there are several options available for managing debts such as debt snowballing, debt avalanche, DMPs, and debt settlement that can help you get the relief you need and deserve.
While debt management plans can be effective tools for paying off your debt, they're not always the best strategy.