Debt Management Myths: What You Need to Know

Debt management plans might be the most productive and least appreciated member in the family of debt-relief solutions that includes debt consolidation loans, debt settlement and bankruptcy.

DMPs, as they are sometimes called, 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 payments, reducing the interest rate on debt and creating an affordable repayment plan that eliminates debt in a 3-5 year window.

To repeat: A simple, straightforward approach.

American consumers could use some of that as credit card debt passed the $1 trillion mark in 2019 and the delinquency rate (no payment in 90 days) climbed to 2.61% for the fourth quarter of 2019. That’s the highest credit card debt ever and the highest delinquency rate since Q1 of 2013.

Yet, if people start looking at debt management plans for relief, they likely will have to get past some myths and misconceptions that overshadow just how effective it is. Here are seven myths we can confidently dispel for you.

MYTH NO. 1: Anyone Can Enroll in a DMP

This is absolutely not true. About one-third of the people who call InCharge Debt Solutions for debt relief, aren’t counseled to enroll in debt management plans because it’s not their best debt-relief option. Instead, they will be advised to choose an alternative. Debt management programs are designed to assist individuals who have enough discretionary income to pay essential bills (rent, utilities, food, transportation), but aren’t good at managing their money. Counselors will put together a budget to see if you can meet those expenses and still have money to pay off credit card debt.

If you have a good income but don’t use a budget or make only minimum payments on your monthly credit card bills, you could be a candidate. The amount of your debt is not a factor and neither is your credit score. Debt management plans work for people with credit card debt from $1,000 to $150,000 and everywhere in between. The same is true of credit scores.

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 scoring system that is to blame, not the debt management plan. Let’s explain. FICO, which produces 90% of credit scores used by lenders, has a formula to arrive at those scores.

The formula does not have a penalty per se for joining a debt management program. However, it does include one key factor – credit utilization – that will affect your score, but only temporarily.

Here’s how: Credit utilization is the amount of credit you have available and counts for 30% of your score. When you join a debt management program, one of the requirements is that you close all credit cards. If you had four cards and surrendered each of them, that significantly reduces the amount of credit you have available and thus, lowers your score.

However, when you make on-time payments – and thereby reduce the amount of debt – things turn around. It usually takes only six months to have your score rebound and continue climbing as you whittle down your debt.

So, with a debt management program, you’re looking at slight drop during the first six months, followed by a steady gain that could improve your score by 50-100 points by the time you finish the program. Compare that against debt settlement, a stain on your credit report for seven years and bankruptcy, which is a drag your report for 7-10 years. Both of those have far more 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 30-48 months while waiting for it to be settled or the late payment penalties that become part of the final settlement.

In the end, your total savings are a lot closer to 20%-25% of the debt than 50%. You could face liens against property or court judgments against you while waiting for a settlement to occur. There also is the matter of a seven-year negative mark on your credit report that means higher fees for any loan or credit card you take out. In other words, if it sounds too 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 offer debt management plans. A credit counseling agency certified by the National Foundation for Credit Counseling (NFCC) 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. Creditors offer to reduce the interest rate to 8%-9% in one program and maybe 2%-3% on another. It depends on how thorough your credit counselor is 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.

Which brings up the issue of choosing a nonprofit debt consolidation agency like InCharge Debt Solutions, or a for-profit agency. The for-profit agency may only recommend something that will generate revenue – and profits! – for them. Because of its nonprofit status, InCharge, by law, must present the option that is in your best interest, not theirs. And InCharge’s counseling service is FREE!

 MYTH NO. 5: Debt Management Plans Take Effect Immediately

They do not. It’s possible to get it going quickly, but that is contingent on you acting aggressively to get things moving. If you sign the agreement and mail a check immediately, your creditors could receive their first payment in as little as 7-10 days.

One thing that could be a holdup is choosing the day of the month you want to select as the recurring day payments are due. For example, you might choose the first day of the month and all subsequent payments are due the first of every month or you may choose the 15th or 30th or whatever day.

It is wise to take into consideration the date other recurring payments come due – things like rent, auto loan, student loan, etc. – and find a space on the calendar when money is easily available for the monthly payment to the debt management program. Remember: if you are late with even one payment, the creditor could cancel the concessions on interest rates and late fees that were made when you started.

When the payment is received by InCharge, it will take another three days to hit the creditor’s account, so factor that in if you’re worried about getting hit with a late payment charge. If there are payments due before your first check arrives at InCharge, the counselors will tell you to make a separate payment directly to the creditor so you stay current. If you already are 3-4 months behind, you will incur late fees until the creditor accepts your proposal and starts benefits. Those benefits could include cancelling all late fees. That is up to the creditor.

If you are receiving harassing phone calls from collectors, that should stop after the first few payments are received by the creditor, but could continue. Typically, when a creditor finds out you are on a debt management program, they stop the phone calls.

MYTH NO. 6: Credit Counseling and Debt Management Programs Are the Same Thing

Not sure how this myth was born, but it’s a popular one. As mentioned above, credit counseling is an educational service that nonprofit agencies like InCharge provide free to any consumer. Credit counselors look at income, expenses and do a high-level examination of your credit report, then offer counseling intended to increase your cash flow and reduce debt. 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 be debt settlement, a debt consolidation loan, bankruptcy or a do-it-yourself approach.

 MYTH NO. 7: All Debt Management Agencies Are Trustworthy

That would be nice, but there are bad apples in every barrel, including this one. The first sign that you’re dealing with an unscrupulous agency is if they ask for money up front “to get the ball rolling.” That’s against the law. Agencies can’t charge for services until after they delivered the service.

Another easy check is whether they have been certified by the National Foundation for Consumer Credit (NFCC) or the Financial Counseling Association of America (FCAA). The NFCC and FCAA have rigid standards for their member agencies and require they be accredited by a third-party organization called the Council on Accreditation every four years. Counselors must be trained and certified to counsel clients on what is their best option.

Do some research and visit review sites like TrustPilot to see if the agency is named in a positive or negative light on things like sending payments and client statements out on time; offering educational workshops or workbooks to increase financial literacy; and responds quickly to customer service calls.

Hopefully, this clears up some of the misconceptions about debt management programs and how they can help you regain financial control. Credit card debt is a burden for many American families and it’s a heavy one. The average U.S. household owed about $7,000 for credit cards at the start of 2020 and pays nearly $1,200 a year in interest because it carries the debt over from one month to the next.

The New York Federal Reserve said that total household debt reached a record $14.15 trillion in Q4 of 2019, the 22nd consecutive quarter that it has increased. Something else to consider: 80% of parents with children say they have credit card debt.

The warning signs have been posted.

Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.

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    1. Sullivan, B. (2018, January 11) State of Credit: 2017. Retrieved from
    2. N.A. (2020, February 18) Delinquency Rate on Credit Card Loans, All Commercial Banks. Retrieved from
    3. NA (2020, February) Household Debt and Credit. Retrieved from