How debt management differs from debt consolidation

If you’re in debt and don’t see an easy way out, you might have started investigating your options. That could include two similar-sounding debt relief options: debt management and debt consolidation.

What’s the difference?

While both options involve combining several outstanding balances into one balance that you can make a single payment for at a lower interest rate, they are quite different. For one, debt consolidation involves a loan and debt management doesn’t.

The kind of debt you have (and how much) along with your credit scores will play a role in which option may work best for you.

What is debt management?

A debt management plan (DMP) involves working with a credit counseling agency that becomes the go-between with your creditors. The agency works out a deal to lower your monthly payments through reduced interest rates and likely reduced or eliminated late fees and penalties.

You then make one monthly payment into an account held by the credit counseling agency. The agency uses that money to pay your creditors. Debt management plans usually last three to five years, so it’s important that you have reliable income to pursue this option. If you miss even one payment, you could nullify your plan and lose your lower interest rate and other negotiated benefits.

What kind of debt is debt management good for?

A debt management plan can only be used for unsecured debts like credit cards, and only some personal loans issued by your bank. You typically cannot use a debt management plan to lower your interest rates with online lenders. And you cannot use one of these plans for secured debts like a mortgage or car loan. You’ll also pay a fee to the credit counseling agency each month. That fee is state-specific and will typically be anywhere from $50 to $75, but for those who qualify, there may be no fee at all.

Your credit score is not a factor in whether you qualify to consolidate your credit cards using a debt management plan.

Related article: 5 steps to rebuild credit after debt management

What is debt consolidation?

Debt consolidation also rolls several of your outstanding debts into one monthly payment. But instead of working with counselors who negotiate on your behalf, you take out a loan with a lower interest rate than all or most of your other debts and pay them off with this loan. The type of loan you use might include a home equity loan or a balance transfer credit card.

Depending on your credit score and other factors, you might be eligible for a secured or unsecured loan. A secured loan means you’ve put up collateral to “secure” the loan in case you default. These loans may be easier to get and have lower interest rates because the lenders have something to collect if you don’t pay. With a secured loan, though, if you default on the loan, you risk losing your collateral, like your house if that’s what you use. Also, your credit score will matter with debt consolidation. You may need good or even excellent credit to get a loan with a low enough interest rate to make consolidating your debt worthwhile.

Related article: Can I get a debt consolidation loan if my credit is bad?

Which debt relief method makes more sense?

Whether you choose debt management or debt consolidation will depend primarily on your financial situation. If your credit is fair or poor and/or you don’t have any collateral to offer, you might not qualify for a debt consolidation loan with a low interest rate.

The size of your debt also plays a role. If the amount of debt you want to consolidate is much larger than the loan you could get, then a debt management plan might make more sense.

Here is a breakdown of situations in which these debt relief options make sense:

Debt management:

• Your credit score isn’t good enough to qualify for other debt relief options like a debt consolidation loan.
• You want help negotiating lower interest rates and fees with your creditors.
• You’re comfortable going without new credit for up to five years depending on the amount of your debt.
• You’re looking for budget or debt management support from a credit counselor.

Debt consolidation:

• You have good or even excellent credit.
• Your income is enough to handle making your monthly loan payments, including interest and fees.
• You feel comfortable managing and paying your own debt.
• You want to be able to apply for and use new credit.

Both debt management and debt consolidation have the possibility of allowing you to lower your monthly debt payments and pay them off more quickly. But for them to work, you need to make sure you can afford the payments and stay on top of them for the long term.