Debt Consolidation vs. Debt Management

Nearly half (48%) of the 179 million adults in the United States who own a credit card, carry a balance forward every month, according to a 2016 survey by the Financial Industry Regulatory Authority (FINRA) and 32% of card owners make only the minimum monthly payment due.

Add the fact that households carrying a balance from month-to-month typically pay 20-36% interest rates on credit cards and owe an average of $16,048 and it’s not hard to figure that millions of American consumers are a missed payment or two away from a financial crisis.

If you have to pay 25% interest on a credit card balance of $16,048, your interest payment alone for one month would be $330!

Where do you turn for help when your credit card debt – or any other form of unsecured debt – gets that far out of hand?

Average Debt Statistics In America

Each state has it’s own issues in it’s citizens debt. Some have lower average credit scores, and others have higher mortgage debt. See how your state measures up:

Choosing a Debt Relief Option

There are several options for credit card debt relief, but probably the two most popular choices are a debt management program or a debt consolidation program. Both are practical and proven ways to get out from under the burden of too much debt, though they rely on very different methods.

A debt management program is a plan to eliminate debt, while simultaneously educating the consumer. Credit counseling agencies work with consumers and creditors on issues like interest rates and fees to come up with a plan that gradually pays off the debt, usually in a 3-5 year time span.

Debt Consolidation Loan

Debt consolidation involves taking out one large loan and using the money to pay off several unsecured loans, like those that result from using multiple credit cards. The lender is typically a bank, credit union or online lender and the expected payoff time is 2-5 years.

The one similarity between the two programs is that each requires the consumer to make a monthly payment, but that is where the similarities end.

A debt consolidation loan is exactly what the name suggests: a loan. The lender provides you with a sum of money and expects repayment every month. Failure to make on-time payments will result in late fees and possibly default, which brings with it a whole other set of problems.

Consolidating Debts Without A Loan: Debt Management Program

A debt management program, by contrast, is not a loan. You are consolidating debts with help from a credit counseling agency and creditors, but using your own money to pay what you owe.

Here is how the payment for a debt management program works: You make a monthly payment to a credit counseling agency, who uses it to make payments to each of your creditors in an agreed upon schedule. If you miss a payment, the agreement the credit counseling agency made with your creditors for reduced interest rates and elimination of fees, could be voided.

Compare Interest Rates

The second major difference between the two programs is how they arrive at the interest rate on your balance.

Banks, credit unions and online lenders rely heavily on credit scores when making debt consolidation loans. Any score above 650 could get you a $15,000 loan for 8%, maybe better. The same loan with a score under 650 and the rate jumps into double digits, if you are able to get one at all. Credit scores in the 500s, for example, are seldom even considered for a loan.

Debt management programs do not place much emphasis on credit scores. In fact, the average credit score for DMP clients is around 555.

Creditors set interest rates based on the consumer’s ability to pay. The range could be as low as zero-to-6% for hardship cases (credit scores 550 or below) to an average of 8% for most clients of a debt management program.

There also is a difference in up-front costs.

Debt management programs have a set-up fee of $75 and monthly fees of $30-$55, based on a percentage of your payment. Debt consolidation loans have origination fees ($75); late fees ($15); insufficient funds fee ($15) and even check processing fees ($7). Learn more about debt management program fees.

Both debt relief options can have a negative impact on your credit score, at least initially.

The debt management program asks you to stop using all but one credit card. Reducing your available credit (by closing the cards on the program) can negatively impact your score. However, if you stop using the cards and start paying down the balance, your score eventually improves.

The debt consolidation loan means adding another line of credit, which has a negative impact. However, if you make on-time payments for at least six months, it eventually improves your payment history, credit utilization and credit mix, which will end up being a positive for your credit score.

Don’t Forget About Financial Education

The last big difference between debt management programs and debt consolidation loans is the financial educational aspect:

Nonprofits are required to provide teaching tools that help clients avoid debt problems in the future. They make them available online, in newsletters, through educational books and with other tools that help consumers identify the things that cause them financial problems as well as the solutions they can use to avoid those troubles in the future.

Lending institutions are not required to teach consumers good financial habits, but most have websites that do contain educational material that is useful in learning to avoid debt.

So if you are one of those people who can’t resist the buying clout of a credit card and struggle to meet the obligations that arrive 30 days later in the form of a monthly credit card bill, do some research on debt management programs and debt consolidation companies.

Find out if you are comfortable with the cost and time frame involved and work your way back to financial health.


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Konsko, L. (2014, July 18) Will Consolidating My Credit Card Debt Help My Credit Score? Retrieved from

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