Pros and Cons of Debt Management Plans

So, you’ve accrued some debt. That’s okay. It happens to the best of us. What will make you shine is how you react to the situation and how you remedy it. The first and best step of action is clarifying the scenario and listing down every piece of information you know. Then, you can move on to the debt management plan. Different companies outline different plans with varying rates and duration, but the gist remains same. The main goal is to reduce debt quickly and build up credit score.

Meeting with a credit counselor will help you budget your income and expenses as well as get advice on your debt. Be honest with the counselor about your amount of debt, creditors, assets, income, and monthly expenditures.  If a debt management plan makes sense, the credit counselor will negotiate with your creditors. While the counselor usually doesn’t try to reduce what you owe, he or she may be able to lower your interest rates, waive fees, or reduce your monthly payments by extending how long you’ll be making them. Debt management plans typically require you to make payments for three to five years. You’ll likely have to agree to stop using or close your credit cards, and you won’t be able to get new credit while your plan is in place.

Consider these pointers for deciding if the debt management plan is for you or not.

Pros

  • You’ll be less stressed. Besides potentially saving you money on interest and making your payments more affordable, there’s just one payment to remember each month. You’ll get relief from collection calls and letters and know there’s an end-point to your financial instability.
  • There will be an evolution of built-in discipline. Since you can’t use credit, it should be easier to stay on track.
  • The debt management plan decreases the vulnerability to your credit score. As long as you make your payments on the debt management plan on time, your credit score may not even show the slightest impact.
  • Making timely payments will definitely counteract the damage from your debt loss and closing accounts to satisfy the debt management plan.

Cons

  • Financial illiteracy can cost you. Thus, you need to be extra-vigilant while signing any documents. The debt management is a new, informed phase of your life. So, there is no time to relax by giving the reins to someone else. Since there is an intermediary involved, some things can get lost in translation. Verify every concessions and payment. And make sure your credit counselor is making all the promised payments on time.
  • Unless you can get a really good counselor like Solution2Debt, there is no guarantee of lower interest rates. Your credit counselor may not get your interest rate reduced and thus, you may have to pay more than your fair share.

There might be circumstances where you have to miss payments. These missed payments are damaging not only to your credit score but also to your personal sanity. A missed payment could derail the entire plan. Creditors are also less willing to discuss relations with clients guilty of missed payments.

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