Both are possible solutions to problems with debt. A debt management program is not a loan. It consolidates unsecured debts and tries to lower monthly payments through reductions on interest rates and penalty fees. A debt consolidation loan is actually a loan, with interest charges and monthly payments due. With a debt consolidation loan, you would have to qualify to borrow the amount needed to pay off your debt. The interest rate is normally fixed and, depending on your credit score and history, may need to be secured with collateral like a home or car. Debt consolidation loans usually run 3-5 years.
Although there is variation from country to country and even in regions within country, consumer debt is primarily made up of home loans, credit card debt and car loans. Credit counseling includes an array of services to address consumer debt that is not within the debtor's ability to pay, such as education about credi personal finance, budgeting and debt management. In addition to education, a popular credit counseling option is the ‘‘Debt management plan’’ (‘‘DMP’’, known in the United Kingdom as the Individual voluntary arrangement or "IVA"). In order to initiate a DMP, a consumer would authorize the credit counselor to contact each of the consumer’s unsecured creditors and negotiate with each creditor to lower the consumer’s monthly payment amount, to lower the interest rate, and to waive any outstanding late fees. The debt was then ‘‘consolidated’’ into a single payment.
If you choose laddering, put as much money as you can each month toward the card with the highest interest rate, while still paying the minimums on the other cards. Once that debt is paid off, move on to the card with the second highest rate and so on. But this is very important: Do not close the account once the balance is paid off. That will damage your credit. Just let the account sit at a balance of $0.
“You ideally want to start by paying off the debt with the highest interest rates first,” McClanahan said. Specifically, look for credit card debt with the highest interest rates, and begin to chip away at that. Also keep in mind that credit card debt, though concerning, is a common type of debt. In a recent report, MagnifyMoney found that Americans paid back $110 billion in interest and fees in 2018, up from the $98 billion in interest paid the year before. Although it might seem overwhelming, others have found their way out of the debt — and it’s likely that you can, too.
You’ll pay a nonprofit credit counseling agency to consolidate your debts into one monthly payment, while also reducing your interest rate, in an effort to pay off your debt faster. This is a good option for consumers in credit card debt who have a steady income to repay the debt within three to five years. Unlike debt settlement, a debt management plan should help improve your credit score.
On the opposite end of the spectrum, American Consumer Credit Counseling is impressively detailed with their FAQs and discussion of debt management. They offer a debt management calculator that allows potential clients to input their creditors and outstanding balances to get an idea of the savings they may realize. Established in 1991, the company does business in all 50 states and is accredited by the BBB, AICCCA, and ISO. Their fees are also low ($39 to enroll, and from $5 to $35 monthly). However, they will only deal with unsecured debt, and the site pushes the debt management plan a bit more heavily than other competitors.
A DMP is a payment plan that helps you repay your debts. By using a non-profit credit counseling agency to pay down and off your debt, creditors may also offer to reduce or waive fees, finance charges, or interest rates to ensure success on the plan. Simply, under the plan, you deposit a consolidated payment with us each month, which we in turn disburse to all of your creditors. We also handle calls from your creditors directly. The vast majority of our payment processing is electronic, so funds are transferred directly to the creditors without delay.
As far as options go, I’d recommend you start by talking with a reputable credit counseling agency – one of the options I mentioned in the story. That will give you a baseline to start with. If they can help you with DMP, it’s likely to do the least damage to your credit (with the exception of just paying the debt off) over the long run. If you/they determine a DMP isn’t feasible then you’ll know you have to look at more drastic options like negotiation or bankruptcy.
No. All eligible unsecured debt must be accounted for in a debt management plan, even those bills that you typically have no problem making payments on. The credit counseling agency in charge of your debt payment plan will want a full accounting of income and expenses in order to arrive at an accurate amount available to make the monthly DMP payments so be prepared to include all eligible debts.