Life On A Debt Management Program
There’s no sense sugarcoating it. Debt stinks, but getting out of it can be a pretty smelly proposition as well. That’s because it’s can be hard to conquer a mountain of debt, and most people don’t like hard.
Easy, as we all know, is much easier.
The problem is that taking it easy is not going to how to budget your salary and determine your best path to financial stability. Ferreting through your monthly expenses and revenue will determine how much can be paid on your debt.
You will get an estimate of how long it will take to complete your DMP, as well as a breakdown of the amount owed to each creditor and the payments they will receive.
A DMP typically takes 3 to 5 years to complete – if the client sticks to the budget.
What to Expect Once the Plan is Set Up
Expect some uneasiness at first, if for no other reason than your security blanket is being taken away. That blanket is your credit card(s), which you’ve been able to whip out whenever the need or want arises.
All but one of your cards are either cancelled or declared off-limits in a DMP. Additional credit card charges are disruptive since they affect your payment schedule and monthly amount.
Don’t worry, the initial credit-card withdrawal symptoms will pass. They will be replaced by a sense of relief. A DMP covers non-secured debt like credit cards and medical bills. Instead of juggling a bunch of payments each month, you’ll make only one and never again have to fret over late fees.
Calls from collectors should cease, though it may take up to three months for the billing cycle to reflect your new payments. If collectors call after that, just hang up don’t worry about being polite.
After anxiety and then relief, you should expect a sense of accomplishment when you see the program really kick in.
Your interest rates likely will drop 10% or more, which is real savings. For instance, say you have $20,000 on a credit card with a 21% interest rate. A minimum monthly payment would be $800.
If that’s all you paid and didn’t add any new charges, you’d have the card paid off in just under three years but pay $6,533 in interest.
If your interest rate was reduced to 12% in a four-year DMP, your total interest payments would be $5,276.
Take that, Evil Credit Card!
Enrolling in a DMP doesn’t mean a loss of financial freedom. It means a loss of the ability to abuse your financial freedom.
Just remember, it’s better to put $5 toward your debt than $5 toward a double-latte with pumpkin sprinkles at Starbucks.
Living on money you actually have, as opposed to credit, can be discombobulating at first. You can still have a credit card, but it should be used only in emergencies.
(Note: the Midnight Madness Sale at Macy’s is not an emergency).
The sad fact is that a lot of people can’t handle the hardships.
Precise figures are hard to come by, but a study by Cambridge Credit Counseling found that almost 50% of DMP enrollees do not complete their programs.
It’s important to find a debt management company endorsed by the National Foundation for Credit Counseling. In an NFCC study, 56% of people who enrolled in DMPs in 2010 had either completed the program or were still involved four years later.
Unfortunately, the other 44% had presumably just fallen off the debt cliff.
Benefits of Paying off a DMP Quickly & How to Do So
It’s pretty simple. The sooner you get out of debt, the better your financial situation will be.
If you need a loan but are on a DMP, you may still be able to qualify for one. On-time payments will help your credit score will improve, so you’ll get better interest rates if you need to buy a car or make any other major purchase. You will be able to start putting more money into an IRA or other retirement plan.
Turning the payoff clock ahead is relatively easy if you get a raise, an inheritance or a winning lottery ticket. The good news is there are plenty of other ways to make money these days if you are willing to try.
The bad news, at least if you’re not motivated, is that you’ll have to get a part-time job, try selling stuff on eBay or find some other revenue-generating pursuit.
You can also cut expenses. Don’t eat out, give up Starbucks, don’t’ run the air conditioner so much in the summer or heater in the winter, carpool, stay home for vacation.
All this belt-tightening can be uncomfortable. It helps to remember there is a light at the end of the debt tunnel, and plenty of people have found it.
Advice from Enrollees
The stories are different but they’re all basically the same. A person gets caught in the debt trap and can’t get out.
It’s usually not for a lack of trying. But they either lack the knowledge and/or the willpower to succeed.
That leads to problems beyond paying bills, like anxiety and depression. Then they hear about debt management programs and figure it’s worth a try.
“It sounded like a great plan,” said Hynson, who had $30,000 in credit card debt when he called InCharge.
His personalized plan called for the debt to be paid off in four years. Once he got used to the routine, Hynson was like a lot of DMP clients.
At last, he was in control. He felt empowered and started putting all he could toward his DMP. That meant giving up vacations and cutting back on socializing and living a simpler life.
“Don’t live beyond your means,” Hynson said. “If you see something you really want, ask yourself, ‘Is it a want or a need?’”
Successful clients usually find their minds are reprogrammed. The budgeting lessons and lifestyle they got from a DMP carries over after the last payment is made.
Hynson made his three months early and has become one of the thousands of DMP disciples. Their message is simple.
Life under a debt management plan can stink. But in the end, you can bask in the sweet smell of success.
NA. 2016, August 1. Do Debt Management Plans Work? Retrieved from http://www.chicagotribune.com/business/ct-personal-finance-nerdwallet-debt-management-plan-20160801-story.html
Clements, N. 2016, March 25. The Risk And Rewards Of Consolidating Credit Card Debt. Retrieved from https://www.forbes.com/sites/nickclements/2016/03/25/the-risk-and-rewards-of-consolidating-credit-card-debt/#32fcd23f68ad
El Issa, E. ND. 2016 American Household Credit Card Debt Survey. Retrieved from https://www.nerdwallet.com/blog/average-credit-card-debt-household/