Pros & Cons of Debt Management
Debt management programs are one of the most effective debt-relief options on the market. They work because monthly payments are tied to a custom-designed budget tailored around your income and spending habits.
However, as is the case with all debt-relief solutions, consumers should do research to make sure they understand the ups and downs associated with a debt management program.
Pros of a Debt Management Program:
- Affordable payments: Credit counselors at InCharge review income and expenses to determine how much of your money is available to apply to credit card debt. Card companies 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: A single payment goes from your bank account to InCharge, which then distributes it to all creditors in an agreed upon amount. No need to try and keep up with payment dates and no more late fees tacked on to your balance.
- Fixed timetable for eliminating debt: Debt management programs are set up to eliminate credit card debt in 3-5 years, or less.
- Account management software: You can use this 24/7 to keep track of all payments, update balances and track your progress.
- Improved credit score: Your credit score may take a hit the first six-12 months because all of your credit cards are closed. However, as on-time payments (the largest portion of your credit score) are reported, your score can make a strong comeback.
- Financial education: Credit counselors are there to advise you throughout the repayment process and offer articles, workbooks and other financial literacy that helps you manage debt.
- Phone stops ringing: No more calls from your creditors.
Cons of a Debt Management Program:
- Only applies to unsecured debt: You can’t include student loan, mortgage or auto debt.
- Penalty for missing payment: If you miss a payment, your debt management program may be canceled.
- Cards go away: One of the provisions of the program is that you stop using your credit cards.
- Not every company will accept a proposal for reduced interest rates: The smaller banks and possibly some of the department store or gas station card companies don’t always accept debt management programs.
- Takes too long: Some consumers want a quick solution, and this isn’t one. It’s set up for 3-5 years, so payments remain at an affordable level 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.
Other factors to consider 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 (home or car?) in the next year and need credit to get it?
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 a free counseling session to determine 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 there are other debt-relief options.
The alternative solutions could be:
Debt Consolidation Loan
If you qualify – i.e. you have a very good credit score – you would receive a loan that could pay off your credit card debt at a lower interest rate and monthly payment than credit card debt. 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 creditor agrees to accept payment that is 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. Your credit score will plummet, and you will find it very difficult to get a loan in the future because you didn’t pay back this one. This is something that only should be considered if all other avenues are closed. You may be responsible for paying taxes on the amount forgiven.
When the size of your debt overwhelms your income’s ability to pay, it may be time to consider a fresh start through bankruptcy. A successful bankruptcy filing will eliminate all credit card debt, but also leaves a 7-10 year negative mark on your credit report.
Do-It-Yourself Debt Management
You can absolutely set up a debt management program on your own. InCharge has published this guide on how to do it as well as a debt management template to organize your payments.