American consumers have always been in debt, but never to the extent we were in 2019.
The Federal Reserve of New York reported household debt was a record-high $13.67 trillion in the first quarter of 2019, the 19th consecutive quarter it has increased.
Auto loans (33% of adults have at least one); student loans (18%); and credit cards (60%) are on the rise over the last five years for adults between the ages of 20 and 69.
Of the major borrowing categories, only home ownership (25%) has declined.
More importantly, delinquency rates – failure to make a payment for 90 days or more – are on the rise for homes (4.65%), car loans (2.4%) and credit cards (5.04%), but falling for student loans (4.76%).
So how are consumers, especially those with delinquent accounts, addressing their debt problem?
Two of the most effective methods 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 an effective way to eliminate debt, especially from credit cards, by reducing your interest rate and lowering your monthly payment.
A debt management program does not require the consumer to take out another loan. Instead, a credit counseling agency will work with you to set up an affordable budget that includes a monthly payment and eliminates the credit card debt in 3-5 years.
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 but one credit card accounts and that card should only be used in emergencies.
- 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.