How Do Credit Card Debt Management Plans Work?
If you're struggling with credit card debt, working with a credit counselor to get on a debt management plan could be a good idea. Here's how it works.
When you're struggling with credit card debt, rising balances on your monthly statements and collection calls can add to your anxiety. However, you don't have to face your creditors alone. Many credit counseling agencies offer debt management plans (DMPs), which allow a counselor to act as an intermediary on your behalf.
How Do Debt Management Plans Work?
Credit counseling agencies offer many services aimed at helping consumers manage their personal finances. A DMP is specifically for helping people who are overwhelmed by unsecured debts. Secured debts, such as auto loans and mortgages, generally can't be part of a DMP.
- A single, consolidated payment. After starting a DMP, you'll make a single payment to the credit counseling agency, which will then forward the appropriate amounts to your creditors.
- Potentially lower payments and fees. Your counselor may be able to negotiate lower interest rates, lower monthly payments, and fee waivers for your enrolled accounts.
- Bring accounts current. Your creditors may also agree to bring past-due accounts current without you having to pay off the entire balance at once. You can then make on-time payments that help your FICO® Scores over time, and debt collectors may stop contacting you about those accounts.
- A plan to pay off debt. The goal is to make your monthly payments more manageable and pay off the included debts within three to five years.
You may need to agree to certain terms to qualify for a DMP. For example, you might have to close or stop using all your credit cards while enrolled in the DMP. Although, sometimes, you can keep one card open for emergencies.
There's also often a one-time setup fee and a monthly fee to participate in a DMP. The fees can vary depending on the agency and your state, and they could be more than offset by the savings that your counselor negotiates. Agencies may also offer waivers for low-income applicants.
When Should You Consider a Debt Management Plan?
A DMP could be a good fit if you're struggling to afford your credit card bills and living expenses but can afford to pay something each month. There's no income or FICO® Score requirement, and you could consider reaching out to a credit counseling agency to discuss a DMP if:
- You're behind or have trouble with credit card bills
- You're unsure of how to manage your living expenses and debts
- You want help negotiating with your creditors
- You can't afford the lump sum payment to bring past-due accounts current
- Collection agencies won't stop calling you
How Debt Management Plans Can Impact Your FICO® Scores
After you sign up for a DMP, your creditors may add a notation to your account that you're working with a credit counselor. The notation won't impact your FICO Scores, although other creditors may be able to see it in your credit reports.
Additionally, the actions you'll take while participating in the DMP might impact your FICO Scores in different ways:
- It may be easier to make on-time payments, which can help you build a positive payment history.
- Bringing past-due accounts current could help you avoid new late payments that may otherwise hurt your FICO Scores.
- Closing your revolving accounts might impact your utilization ratio on revolving accounts.
In the long run, paying off your balances can also be better for your FICO Scores than settling a debt for less than the full amount.
How To Get Started With a Debt Management Plan
If you think a DMP might help you better manage your credit card debt, the first step is to reach out to a reputable credit counseling agency.
You could look for an agency that's part of the FICO® Score Open Access for Credit and Financial Counseling program, which lets your counselor share your FICO Score with you for free. The National Foundation for Credit Counseling can also be a good starting point.
You'll then have a one-on-one meeting with a credit counselor from the agency to review and discuss your personal finances. The initial meeting is often free, and you may want to meet with counselors from several agencies to compare their DMP suggestions and the cost. After a careful analysis, the counselor may share the pros and cons of different options, including budgeting, bankruptcy, or a DMP.
When a DMP is a good fit, you'll work with your counselor to determine which accounts to include. Your counselor will then reach out to your creditors with a proposal. Creditors don't have to agree to a DMP, but they may be open to it if you won't be able to afford your payments otherwise.
You'll then set up your payment with the credit counselor, as you'll now be paying them rather than your creditors directly. However, you may need to contact your creditors to change your accounts' due dates to align with your DMP payment.
Once you're going, your consolidated monthly payment could stay the same for the duration of the DMP. As you pay off accounts, your counselor can redistribute the money to your other creditors, helping you get out of debt sooner and pay less interest overall.
Ideally, you can stay the course and pay off your debt within five years or less. However, reach out to your counselor right away if you might have trouble affording a DMP payment. Your counselor may also be able to help you review your options for managing debts that aren't included in the debt management plan.