5 Reasons to Choose a Debt Management Plan

Quick Answer

Reasons to choose a debt management plan include lower costs compared to debt settlement, safer conditions for your credit score, possible reduction in rates, the opportunity to consolidate into one monthly payment and the support to learn new financial skills during the course of your plan.

Man reviewing credit card bill holding credit card at home

When it comes to making a plan to pay off your debt, a debt management plan may offer you the best option. Debt management plans are made with the help of a nonprofit credit counseling company. These are generally used for credit cards and sometimes unsecured loans.

Compared to other options, such as debt settlement or bankruptcy, there is less risk to your credit score when working with a debt management plan. They are also available at lower or no extra cost.

What Is a Debt Management Plan?

A debt management plan is a plan to pay off your debt in full. You make it with the help of a nonprofit credit counselor. The credit counselor helps by negotiating with your creditors to drop your rates, fees or owed amount. The hope is that this results in lower monthly payments.

You will pay whatever principal amount you still owe in full. This is best for your credit score compared to debt settlement, which can hurt your score when you settle for paying only part of what you owe.

Here are five reasons to choose a debt management plan:

1. Debt Management Plans Are Lower-Cost or Free

When you work on a debt management plan with a nonprofit credit counselor, you pay a small fee or nothing for their assistance in making a plan. This is very different compared to debt settlement plans, which can charge you up to 15% to 25% of your settlement amount.

2. Debt Management Plans Don't Directly Hurt Your Credit Score

Debt management plans are intended to protect and potentially help you improve your credit score. They do so by making it easier to pay off debt and maintain on-time payments. This is different from using a debt settlement company, which may suggest or require you take actions that will hurt your credit. These include withholding payments during settlement negotiation.

But a debt management plan may have you close some accounts as you pay them off. This may affect your credit utilization ratio by reducing your usable credit and diminish your credit mix. Both of these moves could negatively affect your score.

However, by paying off your debt and not taking on new debt and developing healthier financial habits, you have the best chance of raising your score in the long term.

3. Debt Management Plans May Reduce Your Rates

One of the biggest goals of working with credit counselors to develop a debt management plan is to lower your interest rates. Credit counselors take on your lenders for you and work to negotiate your interest rates and fees. This makes it possible for you to put more focus and money toward paying off the principal of your debts.

You can use a credit card payoff calculator to estimate what some lowered rates could save you. For many people a lower rate could mean a savings number in the thousands.

4. Debt Management Plans Combine Debts Into One Monthly Payment

You may also be able to combine your debt payments into one monthly payment. As your credit counselors negotiate your rates and fees, they will take over paying your creditors. You may pay a single monthly amount to the credit counseling company, which then disperses this money.

One monthly due date can help with your cash flow. It may be easier to budget for a scheduled payment rather than fluctuating credit card balances with different due dates.

5. You Can Learn New Financial Skills While Making a Debt Management Plan

Your credit counselor can help you learn new financial skills alongside making your debt management plan.

Plans tend to last three to five years, so you'll have the support you need to continue making good financial choices as you pay off your debt. Just remember that you cannot take on new debt as long as you participate in the plan.

Your credit counselor may host workshops or offer extra sessions to work on things like budgeting along with debt repayment.

Make a Plan to Resolve Your Debt

Debt management plans can help you resolve your debt affordably by reducing your rates and combining your payments. They can also do so without directly hurting your credit score. You can also learn new financial skills and get support during your commitment to pay off your debt.

Tackling your debt starts with knowing what's left to pay. You can get on top of your debt when you get your free credit report from Experian. Use your credit report as a jumping-off point for tracking down accounts and seeing how much you owe. Your debt repayment journey doesn't have to wait for a debt management plan to start. You can begin today with the essential information on your credit report.