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What is a debt management plan — and is it right for you?

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If you have out-of-control debt, you probably have made an attempt or two to pay it down. But a debt management plan (or DMP) is a much more organized plan of attack.

You usually enroll in a DMP through a credit counseling agency, where a credit counselor works with your creditors to come up with a schedule of monthly payments that gets you out of the red without defaulting on your credit cards or loans.

CNBC Select explains how debt management plans work, how they can affect your credit and what alternatives you should consider.

Guide to debt management plans

How a debt management plan works

To get into a debt management plan, you need to start working with a credit counseling agency. These non-profit organizations offer services, programs and classes that offer education on financial topics at low cost or free of charge. You can find a reputable agency through the National Federation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).

After you schedule a credit counseling session, a certified counselor will evaluate your financial situation. Based on that, they will recommend the next steps which may include a debt management plan. If that’s the case, they will enroll you in the program and negotiate with your creditors on your behalf to set up a new repayment plan. Note that generally, only unsecured debt is eligible for enrollment.

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You’ll typically pay a one-time enrollment fee (usually between $30 and $50) and an ongoing monthly fee ($25 to $50 per month). Note that this monthly fee doesn’t include whatever you’ll have to pay toward your debt. Your credit counselor will then work with your creditors to lower the interest rates on your accounts (or waive fees) to help you fully repay your debt within three to five years.

The agency handles payments to all accounts enrolled in the program. You’ll receive a single monthly statement and send payment funds to the agency which will pay creditors on your behalf. As a part of the program, you’ll have to close any credit cards included in the plan. Further, your creditors might require that you stop using cards that aren’t part of the plan while you’re in the program.

Does a debt management plan affect credit scores?

Your creditors might note on your credit reports that you’re using a DMP to pay the account, but it won’t directly affect your credit score. However, if you follow through on your debt management plan, your score could rise or fall thanks to:

  • More on-time payments on your credit reports. If as a result of a debt management plan, your creditors report your past-due accounts as current, they’ll also report your monthly payments as on-time payments. Payment history is the most influential credit score factor so your credit will likely benefit from this.
  • Higher credit utilization. Since you’ll close any credit cards included in the plan, you’ll have less available credit. This can lead to a higher credit utilization ratio (or how much of your available credit you’re using), which in turn can lower your credit score. Credit utilization is the second most important credit factor so there’s potential for some negative impact.
  • Accounts paid as agreed. Unlike debt settlement, a DMP doesn’t involve reducing the principal on your debts. You’ll still pay your accounts in full with waived or reduced fees and interest. Your credit reports will reflect this accordingly, which is better for your credit than a “settled” mark.

You can check your credit and the status of your accounts by using a credit monitoring service. Experian free credit monitoring can be a good resource — you’ll get monthly credit report updates from the credit bureau and access to your FICO credit score.

Experian Dark Web Scan + Credit Monitoring

On Experian’s secure site

  • Cost

  • Credit bureaus monitored

  • Credit scoring model used

  • Dark web scan

  • Identity insurance

Is a debt management plan a good idea?

If your debt situation is becoming stressful and you’re a few months behind on your payments, a debt management plan can be helpful. You’ll have the support of a certified professional who will interact with your creditors on your behalf and create a financial roadmap for you to follow. Plus, you’ll likely have an easier time paying down the debt after your interest is lowered and fees are waived — and you’ll have a single payment for all your enrolled accounts.

It’s also a much safer option than debt settlement. While the idea of paying less than you owe may sound enticing, debt settlement as a service can be prohibitively expensive and drag on for years without any guaranteed results. Not to mention, your credit score will possibly take a huge hit.

At the same time, a DMP isn’t always an optimal choice. If your debt is a source of worry but you still manage to pay on time most of the time, you can resolve it yourself with a different method.

Alternatives to a debt management plan

Before you decide to sign up for a debt management plan, consider other options. The following alternatives can help you get rid of debt without hiring a third-party agency and closing your accounts.

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Focus your own repayment efforts

If you’re struggling to stay on top of your payments, sometimes all you need is a strategy. The two most popular ones include the avalanche and snowball methods.

With both methods, you continue to make at least the minimum payments on all of your accounts. Then, if you choose the avalanche method, you focus on the account with the highest interest rate by paying any extra money you can toward this debt. Once you bring the balance down to $0, you can move on to the next debt with the highest interest — and so on. This approach allows you to save on APR charges.

The goal of the snowball method, on the other hand, is to keep you motivated. It works in a similar fashion, but you’ll focus on the accounts with the lowest balances instead. You might not save as much this way, but quickly wiping out an entire debt can give you the confidence you need to keep going.

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Look into balance transfer cards

In a way, debt consolidation resembles debt settlement because it allows you to roll multiple debts into one and possibly save on interest. However, you can consolidate debt on your own — you just need the right tools for it.

A balance transfer card is one such tool. It lets you move balances from your other credit cards and gives you the time to pay them off without interest. You’ll pay a balance transfer fee on each balance you move. The fee is normally between 3% to 5% and what you save in interest payments should easily offset this charge.

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The best balance transfer cards on the market come with rather lengthy 0% APR periods. For example, the Wells Fargo Reflect® Card gives you 0% intro APR for 21 months from account opening on qualifying balance transfers (18.24%, 24.74% or 29.99% variable APR thereafter). Similarly, the Citi® Diamond Preferred® Card provides 0% APR for 21 months on balance transfers (18.24% to 28.99% variable APR thereafter).

Wells Fargo Reflect® Card

On Wells Fargo secure site

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. 18.24%, 24.74%, or 29.99% Variable APR thereafter.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

  • Balance transfer fee

    Balance transfers fee of 5%, min $5.

  • Foreign transaction fee

  • Credit needed

Citi® Diamond Preferred® Card

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

  • Credit needed

Consider a debt consolidation loan

A debt consolidation loan is another excellent tool. It’s a personal loan you can take out to pay off your other debts and have one monthly payment with a fixed interest rate. Many lenders will even pay your lenders directly, taking that task off your plate. Whether you’ll save on interest depends on your credit profile and your lender’s terms. The higher your credit score, the higher your chance of getting a low interest rate.

Like with other strategies, there might be an upfront cost. Origination fees are common and range between 1% and 10% of the loan amount.

CNBC Select recommends LightStream which charges no origination fees, early payoff fees or late fees and can provide same-day funding. SoFi also doesn’t charge these fees and can be a great choice if you’re looking to consolidate high-interest debt. Note that with both of these lenders, you’ll need good credit to qualify.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    7.99% – 25.99%* APR with AutoPay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, and others

  • Loan amounts

  • Terms

    24 to 144 months* dependent on loan purpose

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    8.99% to 25.81% when you sign up for autopay

  • Loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Bottom line

A debt management plan can be a good route if your unsecured debt has gotten out of hand and you’ve been missing monthly payments. Make sure to work with a reputable non-profit organization and remember that you’ll still have to make on-time payments. A DMP requires patience and discipline like most debt repayment methods — but the results are worth it.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every credit guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of credit products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select’s in-depth coverage of credit cardsbanking and money, and follow us on TikTokFacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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Source: CNBC

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