Are you falling further behind on your credit card bills every month?
Despite rosy reports of decreased credit card spending — revolving credit decreased more than 28% in May after a 64.8% plummet in April — Americans still hold $953.2 billion of outstanding credit card debt.
If your income has been affected by the pandemic, credit card late fees, over-the-limit penalties and compounding interest may make it feel like you’ll never put a dent in your own debt.
And the thought of getting your debt under control — and calling to negotiate better terms with your credit card companies — is enough to overwhelm you as much as your debt.
There is a way that could help you pay off your debt faster and for less money than going it alone: It’s called a debt management plan.
Available through nonprofit financial organizations, debt management plans let you roll all your credit card debts into one monthly payment, helping you repay credit card debt at a lower interest over a shorter period of time. They can even help you improve your credit score.
How can you find a debt management plan that can help you wipe out your credit card debt for less money than you’re paying now? We’re here to answer your questions.
Debt Management Plan: 15 Questions to Ask Before You Sign Up
If you haven’t heard of a debt management plan, you probably have a lot of questions about how they work, how they differ from other programs and how you can get started.
We asked Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C., to help us with answers. The NFCC is the largest nonprofit financial counseling organization in the U.S. and offers debt management plans through its member agencies.
1. What is a debt management plan?
A debt management plan, or DMP, is a method for consolidating debt. When you sign up for one, you’ll work with a nonprofit credit counseling organization that negotiates with creditors on your behalf to reduce your monthly payment, interest rates and fees.
If you’re having trouble paying your credit card bills due to an emergency, the first call you should make is to your credit card company. Many offer credit card hardship programs.
Once the payment schedule is agreed upon, you’ll make one monthly payment to the credit counseling organization, which will distribute the money to your creditors. DMPs typically take three to five years to complete.
2. Is a debt management plan a loan?
A DMP is not a consolidation loan. You don’t need to apply for one like you would a loan (so no hard credit checks), and you don’t receive any cash through the plan.
3. How do I know if I need a debt management plan?
If you have credit card debt that’s increasing every month despite your best efforts, it’s time to consider a DMP, according to McClary.
“A debt management plan is most beneficial when someone is already falling behind on the debt — they’ve already started to incur late fees and over-limit fees,” he said.
4. How do I sign up for one?
Debt management plans are offered by nonprofit credit counseling agencies — you can find certified agencies through the NFCC and the Financial Counseling Association of America.
These organizations vet the agencies they work with, but it’s still a good idea to ask questions about certifications. Avoid any organization that pressures you into a debt management plan before fully considering your financial situation.
Before you sign up for a DMP, you’ll meet with a credit counselor (this can be online or over the phone) to discuss your situation.
The initial consultation should be free. During it, the counselor will assess your complete financial picture, so be prepared with your credit card statements, as well any other debts you have. You’ll also need your employment information.
As an impartial third party, a qualified counselor can provide advice and tips based on your specific situation. Here’s what to expect when you contact a credit counselor.
Based on your circumstances, the counselor will help you determine if a debt management plan is your best option. It’s possible the counselor will recommend other options if you can potentially get the debt under control on your own or if your financial situation is beyond the help of a DMP.
If you and your counselor do decide a DMP is best for you, you’ll need to be ready to commit to the three to five years of monthly payments you’ll need to make to stay on the plan.
5. How much do debt management plans cost?
The cost of a DMP depends on your ability to pay and on state regulations, but you should expect to pay an activation fee when you start the plan, as well as a monthly administrative fee.
Setup fees are typically around $50, while monthly fees range from $25 to $75. Your fees should be incorporated into the single monthly payment you make to the credit counselor.
Waivers may be available based on your financial situation.
6. If there are fees, shouldn’t I just do this myself and save the money?
If you’re making progress on paying off your debt — the balance is decreasing each month, you aren’t struggling to cover payments, the interest rates are manageable — then yes, you should be able to tackle your debt without a DMP.
However, if the balance on your card keeps growing and you’re struggling, a DMP can help you save time and money — even when factoring in the DMP fees.
“In the vast majority of circumstances, the fees… are far less than the total amount of interest and fees that the person would have otherwise paid if they had tried to administer the debt on their own,” McClary said. “Instead of taking 15 or 20 years to pay down a large amount of credit card debt, they can be free of that debt within four or five years.”
Additionally, by combining your credit card debts into a single plan, you’ll only have one monthly payment to make, which can help simplify bill payments.
7. Can I keep my credit cards?
As a general rule, all of your credit cards should be included — and closed or suspended — while you are in a DMP. And you won’t be able to open new credit card accounts until you reach the end of the plan.
You may be allowed to hold onto one card for emergency or business purposes, but you’re essentially agreeing not to use a credit card while you are on the plan.
“This is primarily to help people focus on managing expenses without relying on credit while paying down their debt,” McClary noted in an email.
8. Does a debt management plan affect my credit score?
Temporarily, you may see a hit to your credit score if you must close your credit card accounts, and creditors will add a note to your credit report indicating you’re enrolled.
However, signing up for a DMP can actually improve your credit score fairly quickly because you’re making on-time payments every month and not opening any new credit accounts.
Your credit score often dictates whether you can borrow money and at what interest rate — learn more about what makes up your credit scoreand how you can raise it.
By demonstrating your commitment to paying off the debt, you could see a positive impact on your credit score within the first 18 months of starting a DMP, McClary said.
9. Can I include other debts, like student loans, in my debt management plan?
No. DMPs only cover the following unsecured debt: credit cards, signature loans and sometimes medical debt — although the circumstances vary for medical bills.
However, during your meeting with the credit counseling organization, you should discuss all of your financial obligations, including mortgages, car payments and student loans.
Although your other expenses may not be included in the DMP, the counselor will likely offer budget management solutions that work in conjunction with the DMP.
10. What if my credit card debt is in collections?
You can include debt that is being managed by a collection agency as long as the debt has not led to a judgement in court, according to McClary.
If your credit card accounts are in collections, the counseling agency will reach out to your creditors to ensure you stop getting those harassing phone calls. If the collection agents continue to harass you, contact your counselor.
11. Wouldn’t it be easier to declare bankruptcy?
Filing for bankruptcy may stop the calls from collection agents, but you’ll be paying the cost of bankruptcy long after — a bankruptcy can stay on your credit report for up to 10 years.
While for some people bankruptcy is better than having their wages garnished or their homes put into foreclosure, it should be a last resort for getting rid of debt.
Although the DMP requires you to keep paying your creditors, your credit will recover more quickly and you won’t have to go through the pricy legal process required to file for bankruptcy.
12. After the initial signup, what kind of communication will I have with your counselor and/or creditors?
Your counselor should contact you on a regular basis to check on your progress and whether you’re having any trouble sticking to your payment schedule.
Instead of taking 15 or 20 years to pay down a large amount of credit card debt, they can be free of that debt within four or five years.
However, while you’re on the DMP, you will continue to receive account statements from your creditors. You’ll need to send those statements to your credit counselor so they can monitor your balance and interest rate, in case there are any discrepancies.
You’ll continue to make the same monthly payment while you’re on the plan — after one debt is paid off, the counselor will distribute that money among the remaining creditors until your debts are paid off.
13. What happens if you miss payments or quit a DMP before you finish paying off your debt?
Three to five years is a big commitment, so what happens if you give up — or screw up — and miss your scheduled payments?
That’s when problems begin, which is why you should carefully consider whether you can make the commitment to a DMP before you start.
Your counselor should have reviewed your financial status before you signed up for the plan to ensure your payment fit a budget that allowed you to cover your essential expenses and maintain an emergency fund. If you’re not making those agreed-upon payments, you’ll face some serious financial consequences.
In addition to fees and reverting back to the original interest rates the counseling agency had negotiated down for you, you should expect any progress you’ve made on improving your credit score to be lost.
If you need to leave the program due to a change in financial circumstance, like a job loss or sickness, reach out to your counselor, McClary advised. It is possible to restart a program later when you can resume payments, but you’ll need to communicate that before you miss a payment.
14. If you pay off the debt early, can you stop the plan (and fees)?
If you can pay off your debts earlier than the plan’s scheduled timeline, congrats!
Many participants leave a debt management plan early when there is only a small amount left, and they can make a lump sum payment to close out the remaining accounts, according to McClary.
Just be sure you remember to pay the remaining balance — including any residual interest on the account.
15. Are debt management plans the same as what’s advertised on TV?
No. The late-night TV ads for debt settlement that promise to negotiate away your debt aren’t promoting debt management plans. And although the ads may be enticing, those offers of quick fixes can mean a big gamble, according to McClary.
“They’re promising to make some of your debt disappear without you having to pay it at all, which is pretty enticing,” he said. “But it’s a roll of the dice; they are not always successful in doing that.”
Debt settlement programs are run by for-profit businesses that negotiate your debt by instructing you to stop paying on your accounts. The company then attempts to use the non-payment as leverage to force your creditors to write off your debt.
If their tactics work, you may not have to pay the debt, but your credit score will take a serious hit as you fall further behind on payments while they negotiate.
“And if in the end those negotiations aren’t successful, where do you think that leaves you?” McClary asked.
For many people, the only option left is bankruptcy — and they’ll still be responsible for paying the debt settlement company’s fees.
Using a debt management plan, though, can help you escape the credit card debt you’re struggling to pay off for less money and in less time — and without the harassing phone calls from your creditors.
“The likelihood of succeeding through a [debt management plan] is significantly increased because it’s designed in a way that is affordable based on an individual’s circumstances,” McClary said.
It does require a firm commitment from you to stick with the plan, but financial freedom at the end may make this plan worth your effort.
Tiffany Wendeln Connors is a staff writer/editor at Codetic. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.