Pros and Cons of Using a Debt Management Plan
Utilizing a debt management plan (DMP) to reduce your credit card interest rates and lower your monthly payments may seem like a great idea, but there are some drawbacks as well. Whether or not a debt management plan is the right move for you will ultimately depend on your unique financial situation.
Before taking the leap, it’s important to understand debt management plan pros and cons.
You only need to make one monthly payment
With a debt management plan, you no longer need to worry about making multiple payments each month. Instead, you only need to make one payment to your credit counseling agency.
The credit counseling agency will then make the payments to the creditors on your behalf. This is especially useful if you have a lot of accounts or struggle to keep track of due dates.
With one monthly payment, you’ll no longer have to juggle a complex payment calendar or the constant stress of late fees.
As long as you make the payment to your credit counseling agency on time, you can take it easy for the rest of the month.
You may be able to secure lower interest rates
As part of your debt management plan, your credit counselor will try to negotiate lower interest rates on your behalf.
When it comes to credit card debt and other unsecured loans, high interest rates can drastically increase your monthly payments. Luckily, the reverse is true, too.
Lower interest rates often mean lower monthly payments.
You should be able to pay off your debt faster
With negotiated terms and lower interest rates, most people with a debt management plan pay their debts within three to five years.
With a lower interest rate, you will be able to save money on payments and more of your payment can be applied to the principal balance.
As a result, you might be able to pay off your debt even faster.
You Should See Your Credit Score Increase Over Time
There's no guarantee that a DMP will improve your credit score, but on average, DMP clients 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 both important factors in your credit score.
You are required to close your credit card accounts
Any credit card that is included in your debt management plan must be closed. This ensures that you are not taking on more debt while you pay back your current balance.
It also ensures that you are using the lower interest rate and debt management plan perks from for their intended purpose.
Even if you have a credit card that isn’t included in your DMP, you’re advised against using it, except in case of emergency.
The creditors involved in your DMP can monitor your spending. If they notice new debt, they might ask you to close the account.
You must make consistent payments to keep the benefits
In order to keep the benefits of your debt management plan—lower interest rate, smaller monthly payments and more—you must make consistent monthly payments.
If you don’t, you might lose the benefits. Debt management plans work best for people who are committed to financial change and plan to uphold their end of the agreement.
Not all creditors participate
Even though most creditors participate in debt management plans, some don’t. Although your credit counseling agency will negotiate on your behalf to secure the best terms, the conditions and benefits are ultimately determined by the creditor.
Although it is rare, one or more of your creditors might refuse to participate and if that happens, a debt management plan might not be the best option.
The only way to truly determine whether or not a debt management plan is right for you is to let a certified credit counselor evaluate your situation and provide their recommendation. With MMI, you can complete most of your confidential analysis online, at your own pace, and receive an estimated DMP payment in just a few minutes.