A credit counseling agency may offer the best strategy to pay down debt
When tackling something challenging, coming up with a plan is often a good first step. That is certainly the case when it comes to paying down debt, especially when your balance is already overwhelming and still ballooning thanks to interest.
Debt management plans, which are created and administered by credit counseling agencies, aim to give you a roadmap toward getting debt-free. They can also streamline the number of monthly payments you have to worry about and potentially lower the interest rate and fees you are paying, smoothing the path even further.
A debt management plan is a strategy for paying off certain types of debts, specifically unsecured debts like personal loans and credit cards. Offered by credit counseling agencies, a debt management plan “lumps your debt payments into a single payment with a reduced interest rate,” which in turn “gives you a structured path to pay off the debt over three to five years,” said NerdWallet.
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Once you meet with a credit counselor to create a plan and decide to enroll, the counselor will reach out to each of your creditors, informing them of the plan and potentially negotiating the debt owed, asking them to waive fees or reduce interest. You will then make a payment each month to the credit counseling agency, which will in turn pay your creditors on your behalf. Typically, you’ll owe a one-time fee for the plan’s set-up as well as recurring monthly fees.
The most obvious benefit of a debt management plan: It can help you pay down your debt. “Your counselor works with you to develop a livable budget that makes room for debt payment and savings,” and they may also “negotiate with creditors to secure lower interest rates, enabling you to pay off your debts faster,” said Experian. Further, with a debt management plan, you will need to worry about just one monthly payment to the credit counseling agency.
There are trade-offs, however. “With a debt management plan, you typically must close any open credit accounts,” and “you usually can’t open new accounts until you’ve repaid your debt,” said Discover. You may initially see your credit score drop due to these closures “but not as drastically as it would with a bankruptcy or debt settlement,” which a debt management plan will help you avoid, said Experian.
And remember: This help does not come free — or fast. You will typically owe a fee for the service. In addition, the “plans often take several years to complete, and not everyone can stay the course,” said The New York Times.
“People who have stable income but who find themselves juggling payments for several high-rate credit cards are generally good candidates,” said the Times. To see a debt management plan through, you need to be able to make the payments each month, as missing just one can lead to the plan’s cancellation. But with a plan, you will at least be making these payments under the structure and guidance of a professional (and hopefully with a lower rate).
Keep in mind that these plans only work for certain types of debt. It “may not be as beneficial if your largest debts are secured, such as an auto or home loan, since these can't be included,” or “if several creditors refuse to participate in the plan and reduce interest costs or fees,” said Experian.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
