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Debt consolidation loans and debt management plans are both debt relief options that aim to help you lessen what you owe and get a handle on your monthly payments.
Debt consolidation loans differ from debt management programs in that they utilize new credit to help tackle outstanding debt, whereas debt management programs do this by helping you organize and execute a repayment plan. Read on to learn more about how these two methods are different and how you can use them to tackle your outstanding debt.
What Is a Debt Consolidation Loan?
Debt consolidation is a method of debt relief where you consolidate your various high interest debts, such as credit cards, into a single monthly payment ideally at a lower interest rate. There are two popular ways to consolidate debt, which can help you streamline your monthly payments and save money on interest over time:
- Debt consolidation loan: This wraps your other debts into one monthly loan payment, which you pay off in installments for a set amount of time.
- Balance transfer credit card: This concentrates all your existing credit card debt onto one card.
What Are Debt Management Programs?
Debt management is an approach that involves working with a credit counseling agency to help plan and execute a repayment plan. Once a credit counselor reviews your finances, they'll help you develop and stick to a plan for managing all your debt. Credit counselors may also try to reach out to creditors on your behalf to see if they can negotiate lower interest rates on your debt.
In most cases, debt management plans outline how much you'll have to pay each month and for how long—and your counselor will hold you accountable for sticking to your plan. They may even take over the repayment for you and you'll pay them each month and authorize them to make payment on your behalf.
What Makes Them Different?
The goal of both of these debt relief methods is the same: to help you regain control of your debt and save some money along the way. The tactics used, however, are significantly different. Debt consolidation can be done on your own, and requires the opening of a new account, whether a personal loan or new credit card. A formal debt management plan, on the other hand, is created with a credit counselor and doesn't involve taking on any additional lines of credit.
Repayment under these plans looks different too. With a debt consolidation loan, you will make regular monthly installment payments to your new loan. With a balance transfer card, you'll choose how much you want to pay each month at or above the card's minimum payment, for an indefinite time period, ideally until the debt is paid off. Depending on how much debt you had across different accounts and how much you were approved for your debt consolidation loan or for your balance transfer, you may have to continue to pay down other accounts in addition to your consolidation payment. If you have a balance transfer card that offers 0% interest on transfers during an introductory period, you should attempt to pay off your debt before the promotional period ends and the interest rate rises.
A debt management plan is not a loan but is more of a helpful service generally offered for a low cost by nonprofit organizations. With a debt management plan, your monthly payment typically goes to your credit counseling agency. In most situations, the debt management company will make your monthly payments for you and you'll pay them a single payment that covers all your monthly debt bills. There are some cases where a credit counselor will help you draft a repayment plan but won't take over repayment for you.
What Credit Score Do I Need?
In most situations, your credit score really only comes into play when you have to apply for new credit. Lenders will want to see that you are creditworthy and will use your credit history and scores as an indicator.
If you're looking to get a debt consolidation loan or balance transfer credit card, your credit scores are going to get reviewed by the lender. The higher your credit score, the higher the probability you'll get approved for your new loan or card. But that doesn't mean you have to have perfect credit. In fact, there are many debt consolidation loan options that are geared for people who have less than perfect credit scores. Ultimately, if you have a higher credit score, you may be eligible for favorable terms and conditions on your new loan.
With a debt management plan, there are no credit score requirements as you are not applying for any new debt. These plans are often used by people who are looking to protect or help rebuild their credit.
How Can They Affect My Credit?
Debt relief—if executed well—shouldn't hurt your credit, and it should help you improve your scores over time. With a debt consolidation loan or balance transfer card, there is potential for your score to dip momentarily after you incur a hard inquiry when applying for a new loan. Hard inquiries are reported on your credit score whenever someone checks your reports as part of a new credit application. This change to your credit is typically small and short-lived.
A debt management plan shouldn't affect your scores, as long as you make all your debt repayments on time, whether via the credit counselor or on your own. When working with another party to pay back your debt, make sure they are trustworthy before letting them take on that responsibility for you. Payment history is the most important aspect of your credit scores, so whatever you do, make sure all your payments are made on time.
Which Method Is Right for Me?
Picking the right debt relief option for you will depend on several things, like how much debt you have, how many accounts your debt spread across, the type of debt you have the most of, and whether you have a good enough credit score to be approved for a new loan.
A debt consolidation loan might be right for you if you have a substantial amount of credit card debt across several high interest credit cards. You'll want to avoid paying that high interest across all your balances, so getting another loan with a lower rate could help you save a ton of money.
Think about a debt management plan if you have different types of debt, or more than just credit card debt that is facing default. Credit counseling companies can often help you manage repayment of different debt types, not just credit cards. This type of repayment is also good for people who don't want to apply for new credit, or may not have the credit score necessary to be approved for a new consolidation loan.
If you aren't sure how much debt you actually have and want to learn more about your current balances, consider getting a free copy of your credit reports and scores from Experian to see what's in your credit file.
And if you're interested in applying for a debt consolidation loan or a balance transfer credit card, check out Experian's CreditMatchTM marketplace to be paired with specialized offers based on your credit profile.