The one constant in the U.S. economy over the last six years is debt. It keeps going up … and up … and further up.
Household debt rose $155 billion in the first quarter of 2020, the 23rd consecutive quarter it has gone up. The total household debt in the U.S. stands at a record-high $14.3 trillion.
Mortgage balances, up $156 billion, led the way, but only because the coronavirus and subsequent quarantine measures kept people – and their credit cards – at home during the month of March. Credit card balances declined $39 billion for the quarter and probably will take a dive when Q2 results emerge in August.
Still, American consumers owe $1.03 trillion on credit card accounts or about $9,333 for households that carry a balance. Add that to the $1.54 trillion owed in student loans, another $1.35 trillion in auto loans and a rapidly expanding appetite for personal loans – 20 million consumers owe an average of more of than $16,000 – and debt is a hot topic in the U.S.
The good news is that people are actually making an effort to pay off some debt. The delinquency rate (90 days past due) declined in all major categories with the exception of mortgages, where delinquencies went from 1.10% in Q4 of 2019 to 1.17% in Q 1 of 2020.
Two of the most effective methods for paying off debt are debt management and debt settlement, two solutions that share a first name, but little else.
What Is a Debt Management Program?
A debt management program is designed to lower the interest rate and monthly payment on credit card debt to an affordable level.
A debt management program does not use credit scores as a qualifying factor, nor does it require the consumer to take out another loan. Instead, card companies provide reduced interest rates to nonprofit credit counseling agencies to assist them in developing an affordable budget for the consumer. The consumer makes a fixed monthly payment and eliminates the credit card debt in 3-5 years.
Debt management programs are designed for help with credit card debt, but some allow personal loans or medical bills to be included.
Debt Management Program Advantages
- Debt management programs offer structured plans that enable you to repay debt faster thanks to benefits such as lower interest rates and waived fees.
- You save time and money, and generally your credit score improves during the course of your program, as long as you make on-time payments.
- Enrolling in a debt management program will get debt collectors off your back.
- You no longer need to send monthly payments to each of your creditors listed on the debt management program. You just send one consolidated credit payment to your debt management provider and they send your payments to creditors on your behalf.
- The debt management provider also sends you a monthly statement showing debt management account activity and balances, so you can monitor your progress.
Debt Management Program Disadvantages
- A debt management program won’t work if you can’t make regular monthly payments. Once you miss or make late payments, your creditors will remove you from the program. This eliminates any benefits you’ve been granted, and you’re back in the same negative situation.
- Debt management requires you to close all of your credit cards.
- Some people simply have too much debt to benefit from a debt management program. These programs are designed to offer affordable monthly payment schedules that last 3-5 years. You may have so much debt that even with reduced interest rates and fees, you can’t afford to repay your total debt within that timeframe.
- While many providers are nonprofit, some agencies charge high fees for a debt management plan and may not disclose that your full monthly payment is not applied to the repayment of your debt. Using a nonprofit provider can help you avoid paying unnecessary fees.