Is a Debt Management Plan Right for Me?
If you’re struggling with debt, a debt management plan (DMP) is one option that may help you get out. But is it right for you? There are several factors to consider when deciding if it’s right for you.
What is a debt management plan?
A DMP is a method to help you repay your unsecured debt, usually credit card debt. It can't be used for secured debt, like a mortgage or car loan. It's similar to a consolidation loan, in that it lets you simplify your finances by consolidating all those unsecured payments into one deposit per month. You make that deposit to the agency administering the DMP (typically a nonprofit credit counseling agency), which then pays your creditors on your behalf.
A DMP isn't a loan, however. There's no credit check to get a DMP and, unlike a consolidation loan, you can cancel anytime.
Benefits of a DMP
There are some crucial benefits to a DMP. For starters, most creditors offered interest rate reductions for repaying your debts through a debt management plan. This can save you a significant amount of money over time and greatly speed up the repayment process. And in many cases, late or over-limit fees may be reduced or waived. If your credit accounts are delinquent, a DMP can help stop collection attempts.
Every creditor is different and your specifics benefits will vary depending on which credit accounts you include on your DMP. Nearly all major creditors offer some form of benefit for using a debt management plan. Medical debts and accounts being managed by third party collection agencies can often be included in a DMP, though you aren’t likely to receive any special benefits for these accounts.
How to tell if a debt management plan will work for you
Here are some things to consider when deciding whether or not to use a debt management plan:
Do you have a source of income?
There’s almost no repayment option that will work for you if you don’t have some form of income. When a nonprofit credit counseling agency administers a DMP, they are obligated to ensure that the plan is affordable and works as part of a balanced budget. If you barely have the income needed to manage your basic essentials (food, shelter, etc.), then debt repayment should not be your top priority and a DMP is unlikely to be a good idea until you can increase your income.
However, if you have steady income, but are just struggling to make your debt payments balance against the rest of your budget, then a DMP may be a great choice for you.
Are you struggling to make a dent in your debts because of high interest rates?
A DMP is likely to reduce most or all of your high interest credit card rates, allowing more of your monthly payments to go towards principal. This will allow you to pay down your debts quicker. In fact, most DMPs are repaid within 3-5 years.
Have you missed any payments in the past six months?
Missed payments don’t disqualify you from a potential DMP. In fact, there are no credit requirements for a DMP, so unlike many consolidation loans, if your credit has suffered from missed payments you can still qualify for a DMP. Creditors will also often bring your account current after you’ve made a certain number of consecutive payments through your DMP.
Are you looking to make a major purchase in the coming months?
Accounts included on a DMP are usually closed by the creditor. Because the age of your accounts is a factor in most credit scoring models (and older accounts are better for your score), this means that your credit score may fall immediately after starting a DMP. If you need your credit in premium shape for a major purchase (home, car, etc.), then you may want to wait before starting a DMP, or look into another option, like a low interest consolidation loan.
Are you trying to raise your credit score?
If your score is already low because of missed payments, then a DMP may be a good option. The truth, however, is that any option (besides potentially debt settlement) can be a good way to help rebuild your credit, provided that you:
- Make payments consistently each month, as agreed upon, and
- Pay off your debts in full.
The DMP’s single, consolidated payment and reduced interest costs can certainly help you rebuild your credit over time, but that only works if you’re able keep making your payments straight through to the end.
Do you need help staying accountable?
One unique benefit of using a DMP through a nonprofit credit counseling agency is that it comes with continual support and assistance from a team of trained financial educators and counselors. If you’re self-directed and only need the boost of a lower interest rate and consolidated payment, then a low interest consolidation loan may be what you need. But if you feel you might need a little extra support to break old habits and stick to your new goals, then a DMP may be the way to go.
Ultimately, if you're not happy with the amount of credit card debt you're carrying and you're struggling to make progress, it's worth your time to talk to a credit counselor and see if a DMP is right for you.