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A debt management plan is a type of repayment plan that is set up and managed by a credit counseling agency, and it can be a good way to pay down debt if your credit is in poor shape. The credit counseling agency can help you potentially get a lower monthly payment and interest rate and even pay down your balances over three to five years.
But there are also possible drawbacks to getting a debt management plan. It may not include every type of debt you have and could reduce your access to credit, and the credit agency may charge various fees. Depending on your situation, a debt consolidation loan, balance transfer credit card, or even the debt snowball or avalanche payoff methods may be better options. If your financial situation is in bad shape, debt settlement or even bankruptcy may also be on the table.
Here are six alternatives to a debt management plan.
1. Debt Snowball Method
The debt snowball method is a strategy for paying down multiple debts, particularly credit cards. The idea is that you pay only the minimum amount due on all of your cards except for the one with the lowest balance. With that one, you'll make extra payments every month until it's paid off.
Then, you'll take the amount you were paying toward that account and apply it to the card with the next lowest balance, in addition to that card's minimum payment. You'll keep doing this with each account until you've paid all of your debts in full.
This option may be worth considering if you don't have good credit but can afford to pay at least a little extra toward your debt. And because you're targeting the accounts with the lowest balances first, small wins early on can help you stay motivated.
2. Debt Avalanche Method
The debt avalanche method functions similarly to the debt snowball method in that it accelerates your payments over time. But instead of focusing on the account with the lowest balance first, you'll target your account with the highest interest rate. Once that debt is paid off, you'll then focus on paying down the card with the next highest rate and so on.
This approach can help you save more on interest charges compared with the snowball method. But if you're stuck paying down an account with a high balance over a long time period, it may be harder to stay motivated to stick with the program.
3. Debt Consolidation Loan
A debt consolidation loan allows you to use just one loan to pay off one or more credit card balances. The primary benefit of a consolidation loan is that it gives you a structured repayment plan. This can be particularly beneficial for credit card users stuck in the minimum-payment trap.
Depending on the lender and how much you borrow, you could get a personal loan you'll pay back over anywhere from one and seven years, and if you have good credit, you may be able to get a loan with a single-digit interest rate.
However, if your credit is fair or even poor, you may have a hard time finding a loan with a low enough interest rate to make this method worthwhile. Even if you do qualify for a lower rate, you'll want to make sure the new monthly payment fits in your budget.
You can also use a home equity loan or home equity line of credit as a consolidation loan, but these loans may come with high upfront costs, and if you default on your payments, you may lose your home.
4. Balance Transfer
If you have good credit, you may be able to qualify for a balance transfer credit card. These cards offer introductory 0% APR promotions for as long as 21 months, allowing you to pay down your debt interest-free. This can not only save you money but also help you pay off your debt sooner because of the lower cost.
That said, your ability to transfer debt will be dependent on the new card's credit limit. And if the limit on the new card is lower than what you have on your existing card, it could result in a higher credit utilization rate, which could temporarily hurt your credit score as you pay down the debt.
Finally, having a 0% intro APR for so long could make it easier to be complacent about the debt. If you don't pay it in full by the end of the promotional period, you'll be stuck with the card's regular APR on the remaining balance.
5. Debt Settlement
If you've been delinquent on your debt for a while, other options, including a debt management plan, may not be able to help you. Instead, you may consider negotiating with your credit card companies to settle for less than what you owe. But there are many drawbacks to this process, including high fees and damage to your credit score, which can make it more challenging to obtain credit in the future.
You can negotiate a settlement on your own or enlist the help of a debt attorney or debt settlement company. With these options, you'll typically pay into an account with the company or law firm, and they'll do the negotiating on your behalf. They will, however, charge fees on top of what you pay to settle. Debt settlement plans should be viewed as a last resort before bankruptcy, and using a debt management plan is almost always a better option than debt settlement.
If you're extremely far behind on your payments and your financial situation is in shambles, bankruptcy may be your only remaining option. While it's worth checking to see if you may still be a candidate for a debt management plan, your credit counselor may agree that it's time to move forward with bankruptcy.
Bankruptcy is never ideal, but it can help you reset your financial situation. With Chapter 7 bankruptcy, you can get your debts wiped out completely, but you will need to liquidate some of your assets to make that happen. With Chapter 13 bankruptcy, you'll get on a restructured payment plan over the next three to five years.
Because a bankruptcy can remain on your credit report for up to 10 years, it's a good idea to consult with a credit counselor or a bankruptcy attorney before you go down that path to get an idea of whether bankruptcy is right for you.
Best Practices for Paying Off Debt
Regardless of which approach you take to pay off your credit card debt, it's important to develop certain habits to effectively avoid repeating past mistakes. A credit counselor may be able to help you get back on track with your payments and help you develop good money habits even without a debt management plan.
Here are some tips to help you pay off your debt in a timely manner and to keep it paid off in the future:
- Pay more than the minimum amount due.
- Limit new credit card purchases or stop using your cards altogether.
- Create a budget and try to live within your means.
- Spend only what you can afford to pay off today.
- Set up automatic payments to avoid being late.
- Notify your credit card companies if you're struggling so that you can avoid late payment charges.
Monitor Your Credit as You Work to Pay Down Debt
Many of these options can impact your credit score, so it's important to keep track of your progress as you rebuild.
With Experian's free credit monitoring service, you'll get access to your FICO® Score☉ and your Experian credit report, which can help you know where you stand and what's influencing your credit score.
You'll also get real-time alerts when changes are made to your credit report, which can help you respond more quickly to potential issues and keep them from doing too much damage. These alerts can also help you spot identity theft before it gets out of hand and provide you with a general sense of your progress as you work to rebuild your credit history.