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Debt Management Plans: What You Should Know

Meeting with a credit counselor for debt management

Jerry Brown • May 2, 2024

Struggling to kick debt to the curb? Enrolling in a debt management plan (DMP) could be a helpful solution. A credit counselor can create one of these plans to help you pay off credit card debt, personal loans, and other unsecured debts.

However, a downside is that DMPs generally come with a one-time setup fee and monthly fees. Plus, debt management plans can indirectly harm your credit profile.

We’ll explain how debt management plans work and discuss their pros and cons so you can decide whether they’re the right fit for you.

What is a debt management plan?

A debt management plan is a repayment plan a credit counseling agency creates to help you pay down unsecured debts like credit cards and personal loans. Instead of juggling multiple payments, you make one monthly payment to an agency, which then distributes the funds to your creditors.

The process starts with a credit counselor’s comprehensive review of your finances. The agency then tries to negotiate lower rates with your creditors. A credit counselor generally creates a plan to help you pay off your debts within three to five years.¹

Chime tip: While scrolling social media, you might see ads that promise to help you become debt-free. These ads might come from a debt settlement company instead of a reputable debt consolidation program, so doing your research is crucial. Negotiating with your creditors to settle debt and pay less than you owe should be a last resort since it can harm your credit.

How much does a debt management plan cost?

When you enroll in a DMP, you usually have to pay a one-time setup fee and a recurring monthly fee. While the costs of these plans vary, the average monthly fee is $25, and the maximum setup fee is around $75. However, depending on your income, a credit counseling agency might waive the monthly fees.2,3

What are the benefits of a debt management plan?

Enrolling in a DMP has several potential benefits, including:

  • Professional guidance: If you’re having trouble creating a debt repayment plan, a certified credit counselor could help.
  • Possible lower payments and waived fees: A credit counseling agency might negotiate lower rates and fees with your creditors, which could lower your overall borrowing costs.
  • Streamlined payments: Making one monthly payment to a counseling agency can simplify your finances and help you avoid late fees for missed payments.

What are the disadvantages of a debt management plan?

Before you agree to a DMP, consider the following drawbacks.

  • You can’t include some debts in a DMP: Only unsecured debts like credit cards are included, leaving out secured loans like mortgages and auto loans. Plus, you can’t pay off some unsecured debts like student loans with a DMP.3,4
  • Fees: Most agencies charge for their services, which could increase your financial burden. Instead, the money you pay a counselor could go toward paying off your debt.
  • Potential impact on your credit score: A credit counseling agency might require you to close any credit card accounts included in your DMP. As a result, this could raise your credit utilization ratio – how much of your total available credit you’re using – and could lower your credit score.⁵
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Do debt management plans affect your credit?

While a DMP won’t directly impact your credit score, the actions you might have to take after enrolling in one could. After closing a credit card account, you might see a temporary drop in your credit score due to a lower total credit limit.

However, making consistent on-time payments over time could boost your credit score. It’s a testament to the idea that short-term sacrifices can lead to long-term gains.

Alternatives to a debt management plan

DMPs are just one of the strategies you can use to eliminate debt. Some alternatives include:

  • Debt consolidation loans. Taking out a personal loan to pay off your existing debt could help you save thousands of dollars if you qualify for a lower rate than the average rate of your current debt. These loans generally come with lower rates than credit cards. However, you might have trouble qualifying for a lower rate if you have bad credit.
  • Balance transfer credit cards. You might qualify for a balance transfer credit card with a 0% APR promotion if you have good to excellent credit. These cards allow you to transfer credit card debt from one issuer to another. You can avoid paying interest if you pay off the balance in full before the promotional window expires. You’ll have to pay any remaining balance at the card’s standard rate.
  • Bankruptcy. As a final resort, you could file for bankruptcy. Before you file, though, it’s crucial to understand that doing so can cause serious harm to your credit score. Plus, depending on which type of bankruptcy you file, it can leave a negative mark on your credit report for up to 10 years.⁶

When should you consider a debt management plan

A DMP could be the right choice if you’re struggling to keep up with multiple high-interest debts and can commit to a structured payment plan. It’s best suited for those who can afford monthly payments and are looking for a way to reduce interest rates and fees.

Here are some scenarios where enrolling in a DMP might make sense:

  • The benefits of the DMP, like negotiated lower rates, outweigh the costs of the service.
  • You can comfortably afford the plan’s one-time fee and monthly payments.
  • You’ve tried and failed to create a debt repayment plan on your own.

Before enrolling in a DMP, compare other options that could be cheaper, like refinancing your debt: this would mean taking out a new loan to pay off your outstanding debts. If you refinance to a lower rate than the average rate of your existing debts, you could save thousands on interest.

Is a debt management plan right for you?

Debt management plans offer a structured approach to tackling debt but are not a one-size-fits-all solution. By carefully weighing the benefits and drawbacks and considering your financial situation, you can decide whether a DMP is the right money move for you.

Exploring all available options, including alternative debt relief methods, is crucial in making the best choice for your financial future.

If you’re looking for other strategies to pay off debt, learn more about the best debt management tips.

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¹ Information from Money Management International's "Pros and cons of using a debt management plan" as of April 11, 2024: https://www.moneymanagement.org/debt-management/pros-and-cons-of-using-a-debt-management-plan

² Information from Money Management International's "Save money and pay off debt with a debt management plan" as of April 11, 2024: https://www.moneymanagement.org/debt-management/debt-management-plan-savings

³ Information from Nolo's "Pros and cons of debt management plans" as of April 11, 2024: https://www.nolo.com/legal-encyclopedia/pros-and-cons-of-debt-management-plans.html

⁴ Information from InChard Debt Solution's "Which accounts can I include to a debt management program?" as of April 11, 2024: https://www.incharge.org/debt-relief/debt-management/which-accounts-can-i-add-to-a-debt-management-program/

⁵ Information from myFICO's "How a debt management plan can impact your credit score" as of April 11, 2024: https://www.myfico.com/credit-education/blog/debt-management-score

⁶ Information from TransUnion's "How long does a bankruptcy stay on your credit reports?" as of April 11, 2024: https://www.transunion.com/blog/credit-advice/how-long-does-bankruptcy-stay-on-credit-report

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