Pros & Cons of Debt Management
Debt management programs are one of the least-publicized, but most effective debt-relief options on the market. However, as is the case with all debt-relief solutions, consumers should research the matter to make sure they understand the ups and downs associated with a debt management program.
Pros of a Debt Management Program:
- More affordable payments. Credit counselors at InCharge work with your card companies to reduce the interest on your credit card debt to a level that you can afford. In many cases, interest rates drop from the mid-to-high 20s down to single digits of around 8%.
- Simple payment. You write one check to cover all credit card payments. No need to try and keep up with payment dates and no more late fees tacked on to your balance.
- Timetable for eliminating debt. Debt management programs are set up to eliminate credit card debt in 3-5 years, or less, if the consumer is motivated to do so.
- Impact on credit score. Your credit score may take a slight hit the first 6-8 months because the credit utilization portion of the FICO formula goes down. However, as your on-time payments (the largest portion of your credit score) is reported, your score will make a strong comeback.
- Phone stops ringing. No more annoying calls from collection agency. Once you enroll, the calls will stop.
Cons of a Debt Management Program:
- Only applies to credit cards. You can’t include other unsecured debt like student loans or medical debt.
- Can’t miss. If you miss a payment, you lose whatever concessions card companies made for you.
- Cards go away. One of the provisions of the program is that you stop using all but one of your credit cards and only use that one in emergency situations.
- Not every company cooperates. The smaller banks and possibly some of the department store or gas station card companies don’t always agree to debt management programs.
- Takes too long. Some consumers want quick solutions and this usually isn’t one. It’s set up for 3-5 years, so payments are lower and you have a better chance to succeed.
Is a Debt Management Plan for You?
Not all consumers are in debt for the same reason and that’s why there are multiple solutions for people trying to climb out of a financial hole.
The ideal candidate for a debt management plans is someone who has high-interest debt (i.e. credit cards) – and a steady enough income to handle that debt – but needs help creating a better budget to guide them down the right path.
On the other hand, debt management programs don’t work for consumers who simply have too many forms of debt – i.e. credit cards, mortgage, car loan, student loan, medical bills – and not enough income to satisfy all their lenders.
Other factors that may qualify (or disqualify) you for debt management include:
- Can I live without a credit card?
- Will I be responsible in making a payment every month?
- Will I be making an expensive purchase in the next year and need credit to get it?
- Do I need outside support to coach me through a crisis?
Take a close look at your situation and see which side you fall on. If you’re not sure, or need help making a decision, call a nonprofit credit counselor at InCharge and get free advice on how to create an affordable budget.
Other Debt Relief Options
Debt management plans might not be the right solution for your credit card problem, but as credit counselors constantly remind us, there are other debt-relief options.
If debt management doesn’t work for you, the alternative solutions could be:
Debt Consolidation Loan
If you qualify – i.e. you have a very good credit score – you could pay off your credit card debt with a loan that will have a lower interest rate and monthly payment. Unfortunately, you still owe the bank that gave you the consolidation loan so you’ve transferred the problem from one source to another.
Debt settlement is when a company negotiates a settlement for you to pay less (sometimes a lot less) than what is owed on your credit card debt. Sound too good to be true? It is! There are a lot of negatives that make this a risky alternative. This is something that only should be considered if all other avenues are closed.
When the size of your debt overwhelms your income’s ability to pay it, it may be time to consider bankruptcy and a fresh start. A successful bankruptcy filing will eliminate all credit card debt, but also leaves a 7-10 year negative mark on your credit report. The good news is that credit card companies are getting better at giving you a quick “second start.”
Do-It-Yourself Debt Management
You can absolutely set up a debt management program on your own. We’ve published this guide on how to do it as well as a debt management template to organize your payments.