If you’re struggling to manage finances because you are inundated by credit card debt, you can consider signing up for a debt management plan (DMP) that would combine several debts into a monthly payment. Moreover, the plan also reduces your interest rate. After signing up, you would have to pay according to the schedule given by the payment plan. The plan typically would last for three to five years. The interest rate cuts are standard for all credit counseling agencies.
- The interest rate is cut by half or more.
- The debt would be paid earlier than the original timeline.
- Merges several debts into one payment.
- It can be used only for credit card debt; it’s not applicable for medical debt, student loans, or tax obligations.
- After signing up with a plan, you would not be able to use the credit card or even get new lines of credit until the plan is over.
- Missing even a single payment can thwart the plan and stop the interest rate cuts.
Would it be right for you?
It’s always better to check if a debt management plan would help you. Only 10% to 20% of them use this option, and out of them, only 50% to 70% complete the plan. The debt management plan is for you if:
- Unsecured credit card debt is between 15% and 39% of your annual income.
- You have a fixed and standard income and can prioritize this plan for five years.
- You would not need new lines of credit while until the plan is over.
- If the debt is less than 15% of your annual income, debt avalanche or debt snowball methods will work well instead. These are not plans but a strategy you can follow on your own.
- You can check if you qualify for a debt consolidation loan. This would also merge various debts to one at a lower interest rate. Moreover, you can also decide the time period and open new credit lines without any restrictions.
- If your debt is more than 40% of your annual income and there is no possible way to pay it off within five years, bankruptcy would be the answer. It will also give you a new beginning, and credit scores will start rebounding in six months.
So, if you feel that a debt management plan would be the best option for you, you must choose a credit counseling agency. Here are some pointers to have in mind while choosing one:
- Choose an agency only if it’s a member of The National Foundation for Credit Counseling and the Financial Counseling Association of America.
- Look for an agency that would offer the services you need and your convenience. Some agencies operate on the phone, or online, or in-person, or all of the above.
- Be prepared to pay the fees every month. The fee depends on the agency you choose, the state you live in, and the plan you need.