Managing personal debt can sometimes become an overwhelming experience. If you have multiple debts or credit card debt at high interest rates, you may need professional help to repay it.

A debt management plan can be a viable option if you want to repay unsecured debts but don’t have good credit. However, before you enroll in a program, it’s important to weigh the pros and cons.

What Are Debt Management Programs?

A debt management program is a service offered by credit counseling agencies and aims to help individuals manage their debts effectively.

These agencies are primarily nonprofit organizations and provide advice and assistance on debt management and consumer credit. Also called debt management plans or DMPs, these programs last between three to five years. These programs are best for people who want to pay off their debts in three to five years and want some relief in interest rates, professional financial advice, or both. 

Although you can talk directly to your creditors about getting relief on your current debts, it’s better when a professional does it for you. 

Pros of Debt Management Programs

There are many benefits of enrolling in debt management programs, as listed below.

Expedite and Simplify Payments 

A DMP allows you to get out of debt faster, usually within five years or less. You don’t have to manage multiple payments as the counselor manages it with a simple repayment plan requiring just one monthly payment from your side.   

Lower Interest Rate

Your counselor negotiates lower interest rates for the DMP, which makes it easier and faster to repay debt. Counseling organizations are usually nonprofit, so you only pay a small monthly fee and minimal charges for these services. 

Improved Credit Score 

Timely debt repayment helps improve your credit score in the long run. Your payment history accounts for 35% of your credit score. 

A DMP is an agreement between you, the creditor, and the counselor, so there will be no negative records on your credit history. 

Expert Advice

While you repay your debts over three to five years, you will also learn valuable financial education from experts. Your counselor can offer personal advice or host events like workshops to help you improve your personal finance and related skills. 

Cons of Debt Management Programs

While there are many advantages of debt management, you should also be aware of a few drawbacks. 

No New Credit

You’re usually not allowed to apply for new credit card accounts while on a debt management program. You may even be asked to close your existing credit cards and restricted from opening any new credit lines, such as car loans, personal loans, and credit cards.

DMPs Are Listed on Your Credit Report

Additionally, when you’re enrolled in a debt management program, it will be listed on your credit report. It may not hurt your score, but most lenders do see this as a red flag and will not lend to you while in one of these programs.

Exclusions

DMPs don’t cover all types of debt. For example, secured debts backed by collateral can’t be enrolled in the program. The primary focus of these programs is credit cards and personal loans. 

Additionally, there’s a chance that all or some of your creditors may not want to participate in such a program. 

How Debt Management Programs Work

Debt management programs are only available for unsecured debts such as credit cards, personal loans, payday loans, overdrafts, or lines of credit. Here’s how a DMP works:

  • You approach a credit counseling agency and tell them about your current financial situation and debts.
  • The certified credit counselor engages with you in a counseling session and analyzes your income, expenses, debt-to-income ratio, and other financials. Your counselor will advise you if you need a DMP. 
  • Your credit counselor contacts all your creditors and starts negotiations to get them to agree to a debt management plan with lower interest rates and repayment duration. 
  • Once everything is set up, you make one lump-sum monthly payment to your counselor (including their monthly fee). Your counselor then distributes this money among all your creditors. 
  • You stick to your monthly payments, and when your DMP is fully paid, you can close your debt accounts.  

Why Choose a Debt Management Program

The delinquency rate for credit card debts rose from 2.27% in Q4 of 2022 up to 3.10% in Q4 of 2023. Delinquencies rise when borrowers fail to pay their debts. And they do so because they cannot manage their debts effectively. 

A debt management program allows you to reduce your monthly payments with lower interest rates and a guided path to a debt-free life. You also get valuable financial advice and expert assistance on money management. Additionally, such programs protect your credit score and credit history significantly. 

Pro Tip: Always look for certified counseling services or credit counselors to avoid falling for scams.

Alternatives to Debt Management Programs

If you don’t want to use a DMP or are not eligible for it, here are a few alternatives.

DIY-Debt Management

The simplest method to manage your debt is the DIY approach. You can use debt repayment strategies like debt snowball or debt avalanche. Another option is to negotiate with your lenders to lower your interest rate or agree to a payment plan. 

Debt Consolidation

You can use a debt consolidation loan to combine all your existing debts into one for a single monthly payment. You must do your research and compare loan offers to find the best possible rates. 

Also, remember that your current credit score will affect the rates of interest you qualify for. If you have bad credit due to late payments, this may not be the right option for you.

Balance Transfer

Borrowers with a good credit score can apply for a balance transfer credit card.

These cards allow you to transfer all your unsecured debt on one credit card with a 0% APR, so you can pay your debts interest-free. However, you’ll need to pay a balance transfer fee. 

Bankruptcy

Consider bankruptcy as a last resort option if you have overwhelming debt and no other debt-relief options work for you. While it may erase your unsecured debts, the negative impact on your credit report will stay for seven to ten years.

Life After Debt Management Programs

Once your debt management program has ended, you can apply for new unsecured debts. Your credit score will improve as you pay down your debts while enrolled in the program.

Be sure to address the reasons why you ended up with unmanageable debt in the first place. This will help you learn how to use credit responsibly so you can avoid the same situation in the future.

Pay Off Your Unsecured Debts With a Debt Management Program

Avoiding your debt will only make it worse. Take action today by speaking to a credit counselor to see if a debt management program is right for you.