Vision Credit Education, Inc.

What are the pros and cons of debt management plans? Attorneys and debt settlement companies only tell you about any potential negatives. For-profit debt management companies tend to focus just on the positives. Here are the facts on debt management.

The Cons

Debt management programs are by no means a magic bullet for your financial troubles. Despite their many benefits, there are still some risks and some costs involved with a debt management program.

• Some interest remains: Although debt management programs are highly effective at reducing the interest rates on credit cards and certain unsecured loans, you still likely have to pay some remaining interest on those accounts. This interest can comprise a portion of your monthly program payment. This amount is normally a fraction of what you would have paid, but it is important to be aware of the remaining interest.
• Certain creditors may show your participation: Some creditors may place a label under your account with one or more credit bureaus. This could complicate getting a loan while you are still repaying your debt. This should be a nonfactor if you focus on repaying debt before opening new accounts. Regardless of whether creditors report your participation in a debt management program, that label has zero impact on your credit score.
• Credit utilization rate may increase: This is the primary impact that a debt management program can initially impact your credit in a negative manner. If you are using less than 50% of your overall credit limits, then your score will likely drop a few points during the first several months of your program participation. Your score would then begin a gradual increase as your balances dropped. Of course,  if you are close to maxing out your credit limits, then this impact is negligible as your score would likely improve even faster.
• Account tenure comes to an end: Up to 15% of the credit score calculation has to do with the length of time that you have held a credit account. By joining a debt management program, your credit accounts are inactivated. While these still can be reflected on your credit report in a positive manner, their significance will decrease over time as they become older. You can guard against this by maintaining other current credit accounts that are still active, such as a car loan or mortgage loan.
• Debt management fees: It is normal to pay a fee for a debt management program. For-profit debt management companies tend to charge higher fees, often up to $50 a month or even more in some cases. There can also be upfront fees. Most nonprofit organizations charge $30-35 per month, and many have no upfront setup fees.
• Pressure to enroll: For-profit debt management companies favor enrollment over any other alternative option that they do not profit from. In fact, they are compensated based on their sales of debt management programs. Many for-profit companies offer extremely limited counseling or education. In order to find out whether your options should include a debt management program, you may wish to contact a nonprofit credit counseling provider. That way, you may obtain more competent and unbiased information from a highly trained Accredited Financial Counselor.

The Pros

These factors are normal benefits achieved through a debt management program.

• Decreased interest rates: Debt management programs are effective in obtaining substantial reductions in interest rates for debtors struggling with high interest rates. Many of the major credit card issuers routinely reduce interest rates from 18-28% or more down to 7-12%. Some can be even lower, while others tend to remain higher. Reputable nonprofit credit counseling organizations can supply you with a good faith estimate of total interest paid over the course of your proposed debt management program.
• Lower minimum payments: The drop in interest tends to allow for a reduced minimum monthly payment. If the majority of your creditors provide a reduction in your payments, then your debt management program payment may be substantially lower than your current regular payments. This reduction is even more pronounced for debtors that are falling behind. Most participants experience a meaningful reduction in their monthly payments.
• Re-aging of accounts: Some creditors are willing to re-age a delinquent account so that it reports as current. This on-time payment status can eliminate pesky late fees. It can also help your credit scores bounce back.
• Reduced repayment period: A debt management program can allow you to repay your debt within a 3-5 year period. This is much shorter than normal debt repayment, which can take many years. A shorter repayment period also reduces the risk of a life event, such as unemployment or hospitalization from affecting your debt repayment.
• End to collection calls: Once a creditor accepts a proposal from your credit counseling organization and receives the initial program payment, collection or courtesy calls almost always stop immediately. Your credit counselor will work with you to maximize creditor acceptance and to resolve any difficult situations that remain.
• Long-term support: Your financial counselor can continue to answer your questions about credit and financial needs. Your DMP support counselors can also field your calls as well as those of your creditors, giving them someone to call besides you.