If you’re struggling with debt and looking for help managing it, meeting with a credit counselor might be a logical first step. Credit counselors can help you create a budget, find ways to reduce your debt or enroll you in a debt management plan (DMP). But before you enter into a DMP, it’s important to know exactly how they work and whether they’re a good fit for your financial situation.
What is a DMP?
DMPs are offered through credit counseling agencies. Under these plans, a credit counselor works with your creditors to lower your monthly payments by negotiating a lower interest rate and/or waiving or reducing any fees or penalties you owe. The actual amount of the debt itself doesn’t change.
DMPs are for unsecured debt, mainly debt that comes from credit cards and personal loans that aren’t tied to an asset like a house or a car. Each month you deposit money into an account held by the credit counseling agency, which then pays your creditors.
Be aware that some of your debts may not be covered by the plan; for example, if you’re in an introductory interest rate period with your credit account or your debt is with online lenders or payday lenders. You also may not be able to enroll student loan debt or debt on business credit cards into a DMP.
Over the course of your DMP, which can last as long as five years, you won’t be able to access most of your lines of credit. That’s because a DMP usually requires you to close any accounts included in the plan. Depending on your finances, and the plan itself, you may be able to keep one credit card open and active.
Who is an ideal candidate for a DMP?
DMPs work best if “you have a steady income. You feel your job is secure,” says Michael Bovee, co-founder of Resolve.
The key to the successful completion of a DMP is consistency. Missing payments can derail the entire plan and cancel any benefits the credit counseling agency negotiated for you.
If you have good credit, a DMP may be a good way to protect it because it won’t negatively impact your credit score, Bovee says, as long as you make the payments on time. In fact, if you continue to make timely payments, being enrolled in a DMP may actually help your score.
Bovee suggests doing a simple calculation before deciding to enroll in a DMP.
“See if you have the ability to make a payment of 2 percent of your combined credit card debts that are enrolled in the plan,” he says. What your monthly payment on a DMP can be reduced to will range between 1.7 and 2.5 percent, and 2 percent is the rough average.
You also have to be comfortable not using credit cards for as long as five years.
What to look for in a DMP
First, start by doing research on credit counseling agencies. Even if the agency is a nonprofit, that doesn’t mean it’s reputable or competent. The National Foundation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) are good starting places for finding accredited agencies.
Many credit counseling agencies charge a monthly fee to manage your plan. Find out how much they charge and whether you qualify to have the fee waived.
A good credit counselor should spend time carefully going over your finances and options with you. To help give them the full picture of your finances, be ready to supply information about your income, assets, expenses and debts. That includes any loans you have and the interest rates you pay on any debts.
You shouldn’t feel pressured into entering a DMP. But if you decide it’s the way you want to go, it’s a good idea to know how much you’ll be paying each month and how long the plan will last. Get it all in writing. It’s also important that you can afford the monthly debt payments.
Your credit counselor can help you create your budget so that you have enough left over for paying necessities like car insurance, utility bills, groceries, and rent or mortgage payments.
“It only takes one setback to cause you to miss a monthly payment toward your DMP,” Bovee says.
You may have to build an emergency fund to handle any unexpected expenses that pop up while you’re on the plan so you can keep making your plan payments, Bovee says.
A DMP won’t magically erase all of your debt. But a good one should make paying off your debt easier, and hopefully quicker.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.