What Is a Debt Management Plan?
A debt management plan groups several credit card debts into one payment, cuts your interest rate and creates a three- to five-year repayment plan.
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If you're having trouble paying your credit card bills every month, a debt management plan from a nonprofit credit counseling agency might be the help you need.
A debt management plan is a way to help you pay down credit card debt while saving on interest. It has less of an effect on your credit score than other debt payoff options, like debt settlement or bankruptcy.
What is a debt management plan?
A debt management plan is a type of financial product offered by credit counseling agencies that can help you pay off unsecured debts, like credit cards and personal loans. Secured debts — such as mortgages or car loans — and student loan debt aren't covered.
A debt management plan lumps your debt payments into a single payment with a reduced interest rate. This gives you a structured path to pay off the debt over three to five years.
There’s no credit score requirement to enroll in a debt management plan. But you’ll need to show steady income that covers both your basic expenses and regular payments toward your debts.
How does a debt management plan work?
Once you enroll in a debt management plan, a credit counselor will contact each creditor to notify them and make itself the payer on your account. The counselor may seek concessions from each creditor, which can include lower interest rates and monthly payments or no late fees.
Each month, your payment will go electronically to the counseling agency, which then pays your creditors on your behalf.
You’ll likely pay a one-time enrollment fee as well as a recurring monthly fee for each credit account in the plan. Fees vary between agencies (see table below). Even with fees, your overall monthly payment should be lower.
As part of the debt management plan, you’ll need to close any enrolled credit accounts, though you may be able to leave one account open for emergency expenses. You won’t be able to open new lines of credit while you’re enrolled in the plan.
Want to see how a debt management plan works in practice? Some providers maintain examples on their website, using information based on their average client. See an example scenario here, from credit counseling agency Money Management International.
Where to get a debt management plan
Debt management plans are offered by credit counseling agencies. Look for an agency that’s a nonprofit and accredited by the National Foundation for Credit Counseling (NFCC).
These four agencies offer debt management plans nation-wide and are each members of the NFCC.
Agency | Average fees |
|---|---|
American Consumer Credit Counseling |
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Cambridge Credit Counseling |
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GreenPath Financial Wellness |
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Money Management International |
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Once you reach out to an agency, expect a counselor to go over your financial situation thoroughly. They may discuss other options with you, like a debt consolidation loan (more on these loans lower down), in addition to a debt management plan.
Don’t feel pressured to sign up the same day any program is offered. Take time to think about it.
Is a debt management plan right for you?
A debt management plan works best if you are someone who has overwhelming credit card debt and your debt-to-income ratio is 43% or more. That means your total monthly debt payments take up 43% or more of your monthly income before taxes and deductions are removed. (You can calculate your DTI here.)
Consider these pros and cons of debt management plans before making the decision to enroll.
Pros of debt management plans
Saves on interest: A credit counselor will try to negotiate lower interest rates as part of your enrollment in the debt management plan. Less interest means it’ll be easier for you to pay down debt, since more money will go to the principal.
Simplifies debt: Instead of juggling multiple due dates per month, you’ll have only one monthly payment with a debt management plan.
Gives you a plan: Credit card debt can feel overwhelming, but a debt management plan gives you structure. If you make all payments on time, you know you’ll be out of debt when the program ends.
Reduces temptation: Having to live without credit cards — and not being able to apply for new credit — might be an advantage if you struggle with overspending.
Cons of debt management plans
Requires multi-year commitment: A three- to five-year commitment is a long time to keep up with your monthly payment. Before enrolling, make sure you can commit to the payment amount for the duration of the plan.
Limits access to credit: Having little to no access to credit cards for up to five years, as well as not being able to open new lines of credit, may be anxiety-inducing for some borrowers.
How does a debt management plan affect your credit?
Your credit score might initially drop, as accounts are closed and you have less available credit. Enrollment in a debt management plan will be noted on your credit report, but it’s supposed to be treated as neutral in credit scoring.
Long term, as you get a handle on your finances, your credit score is likely to climb.
Alternatives to using a debt management plan
A debt management plan is only one debt relief option when debt seems overwhelming, and it might not be the right one for you. Consider other alternatives to debt management plans.
Debt consolidation loans
A debt consolidation loan is a type of personal loan where you use the money from the loan to pay off all your debts at once. You then repay the loan at a fixed interest rate over a set term, usually one to seven years.
These loans are a good choice if you can qualify for a lower rate than the average rate across your existing debts. Debt consolidation loans for bad credit are available from online lenders and credit unions.
Debt settlement
Debt settlement is the process of negotiating down your debts to a lower amount than you owe. You may negotiate this settlement on your own or hire a third party to help, like a debt settlement company.
Debt settlement can seriously damage your credit score and it isn’t always successful, so only consider it once you’ve ruled out other debt payoff strategies.
Bankruptcy
Bankruptcy may be an option if your debt exceeds 40% of your income and you don’t have a plan to pay it off in five years. Speak with a bankruptcy attorney first (consultations are usually free), before considering this option.