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Debt Management and What it Entails

  • If you are someone who is struggling with overwhelming credit card balances, then a debt management plan may be able to help you out. A debt management plan (DMP) is a repayment plan where a credit counsellor helps you determine how much you can pay toward your debt, negotiates with your creditors, and then uses the money that you provide to pay your creditors back until your bills are fully paid off. Debt management plans are designed to help people get control of their debt again, without inflicting as much damage to their credit score as debt settlement or bankruptcy would.

    Debt management vs debt settlement

    Although debt management and debt settlement may sound similar, they are very different. With DMPs, you are paying off 100% of the amount you owe, while debt settlement allows you to pay less than the full balance owed. For that reason, debt settlement will actually affect your credit score much more than a DMP. Debt settlement companies are also very profit driven and will usually charge a percentage of the settled debt.

    How does a debt management plan affect your credit score?

    Enrolling in a debt management plan will not hurt your credit score on its own. Your credit report will note that you are currently participating in a DMP, but such notes are not calculated into credit scores. Do keep in mind though, anyone who pulls your credit report will see it and are free to make any judgement they want on it.

    Is a debt management plan the right thing for you?

    A debt management plan may make sense if most of your debts are unsecured credit card balances, the interest rate reductions are especially favourable, you have a secure income, the payment is feasible for years and does not jeopardise your essential expenses, you are ready to make a necessary budgetary change to pay off your debt, or if you can live a cash-based lifestyle for a number of years.

    Alternatives to debt management

    Even if a DMP is starting to sound like the right way to go, weighing it against other potential options is always a good idea:

    DIY: Call the credit card companies, explain that you want to concentrate on paying off your credit card debts, and even ask if they can reduce the interest rate for you as you do so. Some will and others will not. Then pay your creditors with the same system: determine a fixed amount that you can send them every month and stop charging. As one account is paid off, move onto the next and continue until you are debt free.

    Debt consolidation loan: If you have a decent credit score, then you may be able to use a consolidation loan. With this, you can bundle all or most of your debts into one loan that offers a lower interest rate. Even if the lender charges an origination fee of a few percentage points, you may still be able to come out ahead.  

    Another thing that you can do is search for debt management companies in your area and see what companies there are that can help.

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