Debt Management Myths: What You Need to Know

Debt management plans belong to the family of debt consolidation problem solvers that include loans, debt settlement and bankruptcy.

Debt management plans, however, are the least understood member of the family.

They are not a loan like the first. They do not attempt to reduce the principle amount owed, like the second and they do not eliminate debts in one fell swoop, like the third.

Instead, they are a simple, straightforward approach to consolidating credit card debt and eliminating it in a three-year window.

With credit card debt reaching its highest total in history in 2018 and credit card delinquency – number of people missing their monthly payment – on a dangerous trend upwards, it might be a good thing to dispel some of the misconceptions about debt management programs.

Here are five myths about debt management programs that we can confidently dispel.

MYTH NO. 1: Everyone Qualifies for a DMP

This is absolutely not true. People who have enough income to pay their credit card debt, but just don’t budget properly, will not qualify. Neither do those who are financially strapped because of a significant financial setback in their lives such as a job loss or a divorce. Debt management programs are designed to assist individuals who are financially distressed. If you have some income but find it hard to make minimum monthly payments or only make minimum payments on your monthly credit card bills, you probably qualify. The amount of your debt is not a factor. Debt management plans work for people with credit card debt as low as $1,500 or as high as $150,000 and everywhere in between.

MYTH NO. 2: Debt Management Programs Hurt Your Credit Score

Taken literally, this is completely wrong. Given some context, it is partially correct, though it’s the card companies who are at fault, not the debt management plan. Let’s explain. Credit counseling agencies who run debt management programs do not report any activity to Experian, TransUnion or Equifax, the three big credit reporting agencies. The only way the Big Three find out you’ve enrolled in a debt management program, is if your card company reported it. Some card companies do, some don’t.

To be fair, your credit score could take a small hit when you first join a debt management program because creditors may close a few of your accounts. That reduces the amount of available credit, which lowers your credit score. However, when you make on-time payments, the card companies report that to the Big Three and as soon as six months after starting, your credit score should start to go back up.

As soon as you’ve finished a debt management plan, which is typically about three years, it immediately comes off your credit report and disappears. Compare that against debt settlement, a stain on your credit report for seven years and bankruptcy, which stays on your report for 7-10 years. Both of those have very negative impacts on your credit score.

MYTH NO. 3: You Save More by Choosing Debt Settlement over Debt Management

This one is a little tricky and may depend on how you do your accounting. Debt settlement companies like to brag that they reduce the principle balance by as much as 50%. However, they don’t advertise their fees, the interest you accumulate on your debt for 24-30 months while waiting for it to be settled or the late payment penalties that are part of the final settlement.

In the end, your total savings normally is a lot closer to 20% than 50%. You also could face liens against property or court judgments against you during the waiting period for a settlement to occur. And there is the little mater of a seven-year stain on your credit report that will mean much higher fees for any loan or credit card you attempt to take out. If it sounds to good to be true …

MYTH NO. 4: All Debt Management Plans Are the Same

That would be like saying all cars – Ford, Chevy, Toyota, Mercedes – are the same. They are not, and neither are the credit counseling agencies that present debt management plans. A certified credit counseling agency will tailor a debt management plan to fit the consumer’s needs and goals. There are levels of hardship that affect what your monthly payment will be. You may qualify for an interest rate reduction to 8%-9% on one program and 2%-3% on another. It depends on how thorough a job your credit counselor does at identifying benefits you qualify for.

If you have a credit counselor who is not in tune with all the options available, you could miss out on an opportunity to get more concessions from your creditor. Which brings up the issue of choosing a nonprofit debt consolidation agency or a for profit agency. The for-profit agency may only recommend something that will generate revenue for them. The nonprofit isn’t concerned with making a profit, and by law, they must present the option that is in your best interest.

MYTH NO. 5: Credit counseling and Debt Management Programs Are the Same Thing

Not sure how this myth was born, but it’s a popular one and a false one. Credit counseling is an educational service that nonprofit agencies provide free to any consumer. Credit counselors look at income, expenses and do a high-level examination of your credit report, then offer advice intended to increase your cash flow. They educate consumers on credit, finances and the importance of living on a budget. A debt management program, on the other hand, is an option for solving your debt problem. It is one of the possible outcomes from a credit counseling session, but the outcome could just as easily could be debt settlement, bankruptcy or a do-it-yourself approach to solving the problem.

Hopefully, this clears up some of the misconceptions about debt management programs because it appears American consumers may need some debt-relief options soon.

Revolving credit debt (mostly credit cards) reached a record high of $1.023 trillion in November of 2017, passing the previous high mark of $1.02 trillion set in April of 2008, just before the start of the Great Recessions. That reflects a rise of 5.7% ($55.1 billion) over the past year, according to the Federal Reserve.

The average credit card balance is $6,354 and delinquency rates (consumers not paying monthly credit card bill) have inched up for five straight quarters.

The warning signs have been posted.

Sources

Sullivan, B. (2018, January 11) State of Credit: 2017. Retrieved from https://www.experian.com/blogs/ask-experian/state-of-credit/

Davidson, P. (2018, January 8) Credit card debt hits new record, raising warning sign. Retrieved from