Are you drowning in credit card debt? Stressed and not sure how you’re going to afford to keep your head above water and make your next payment? You’re not alone and I’ll admit, I’ve been there, too — and I survived. The first step is realizing that no matter how bad it is, you do have options and there is a way out. There’s debt settlement, debt consolidation, and even bankruptcy. But before you decide on any of these options, there’s another one to consider — a Debt Management Plan (DMP).
What Exactly is a DMP?
A DMP is a debt repayment plan that is negotiated, arranged and administered through a consumer credit counseling service or a debt management company. Depending on how much debt you carry, a DMP typically takes 4-5 years to pay off. With a DMP, your service provider works directly with each of your creditors on your behalf to lower your interest rates, cut your monthly payments to an amount that you can realistically afford each month, and stops any over-limit or late fees.
Once the repayment terms are negotiated, you pay one monthly payment to the DMP service provider and they distribute the funds to your creditors for you. The service provider will charge a fee to manage the DMP and disperse the funds each month. The fee will vary from provider to provider, but for me the fee was about $10 a month, which more than covered the money they saved me in interest.
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If you choose to go through a debt management or settlement company, be careful and do your homework on them. I chose a nonprofit consumer credit counseling service that was a member of the National Foundation for Credit Counseling. My reasoning for doing so was twofold: A) knowing that they were legit and members of the NFCC gave me peace of mind, and B) for the most part, nonprofit consumer credit counseling services have no ulterior motives other than helping you get out of debt. It’s not about them making a profit from your situation.
If you opt to go with a debt settlement or debt management company, I’d highly recommend that you read and ask the 14 Questions to Ask a Debt Settlement Company before you hire them.
How Does a DMP Affect Your Credit?
Another reason I chose to go with a Consumer Credit Counseling Service (CCCS) was because I wanted to minimize the impact on my credit. In my case, I hadn’t yet fallen behind, but I was close. I was overwhelmed and even though I was paying $200 to $300 on each account every month, my balances weren’t moving. It was being eaten by the never-ending accumulating interest. I was fortunate enough to have worked for one of the top credit scoring companies in the business, so I knew how credit scores worked — what hurt, and what hurt more. So I knew that while a DMP wouldn’t hurt my credit while I was in the program, it wouldn’t be all roses.
While You’re in a DMP
When you enter into a DMP there are a few things you’re agreeing to up front. One, you won’t open any new credit cards or take out any new loans while you’re in the program. If you do apply for credit, the lender or card issuer will decline your application because your credit report will tell them that you’re in a DMP. Don’t let this give you heart palpitations. It’s not a big bold scarlet letter “A” on the front page of your credit report. In reality, the only time the DMP notation would even be seen is if you were to apply for credit, which you shouldn’t be doing anyway because it’s part of the agreement — at least until you get out of debt and back on track.
You also agree not to take on any more debt on your existing accounts while you’re in the program. Your creditors, who have agreed to waive your fees, reduce your interest and reduce your payment, take your commitment seriously and won’t allow you to charge any more. The kicker, and the reason why many people balk at the idea of a DMP — the creditor will most likely close the account once the debt is paid. It’s the nature of the beast, but it’s not the end of the world. Yes, it’s bad for your credit to close accounts — which is why I said DMPs won’t hurt your scores while you’re in them. However, the reason why it’s bad to close credit card accounts is because it can negatively affect your total revolving utilization percentage if you’re carrying balances on other cards. But if you’ve just completed a DMP it means you just finished paying off all those credit cards, so it won’t have the same effect that it would on those carrying other cards with balances.
The other downside to closing accounts is that you eventually lose the credit history on them because they will eventually fall off your credit reports — and that’s where your credit and credit scores could suffer. But only if you never open another line of credit or credit card again. It’s actually healthy to have a credit card or two (if managed wisely) for your credit scores. And this leads me to my next piece of advice.
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The Road Ahead: Leveraging Your Credit Scores
When you commit to a DMP, if there is any way possible, keep one account out of the program. You have a choice. You don’t have to put every account you have into the program, but you need to be careful here. Because I knew going in that I would not have access to the 6 credit card accounts or the history I’d built with them over the years, and that they would be closed at the end of the program, I wanted to keep one card out to help leverage my credit and get back on solid footing (without starting from scratch) when the program ended.
I had one credit card from my credit union. It had a very low interest rate and fortunately, I didn’t owe very much on that particular card so I chose to keep it out of the program and pay it off separately. Just one card — and only if it has a low enough balance that you can handle the payment along with your DMP payment obligations. If you can do this, it’s something to consider. If not, you can always start with a new credit card when you finish the program and have a clean slate.
Once you’re out of the plan and have paid off all your debt, you’ll begin seeing offers (from the same companies you just finished paying off, if you can believe it), to sign back up and open a new credit card account. A word of caution, these offers will not be great and the interest rates will be high. But hopefully after five years of repaying and digging yourself out, you’ll have learned a few things about how to better manage credit cards so that you don’t fall into the same trap. The sole purpose of opening a new account would be to leverage your credit scores.
Personally, I wanted to have solid scores in the event that I ever needed to purchase a new car or buy a home. I wanted the choice and the flexibility that credit provides. Not to run up credit card debt. I had no desire to put myself through that again. But for life’s bigger purchases that make more sense to finance? Yes. I didn’t want to go the route of ‘cash only’ that you hear some finance experts preach. If you like that lifestyle and prefer it, then more power to you. But for myself, and most people these days, we don’t have $300k to plunk down to pay for a house in cash. The same goes for a car — why would I pay $20-30k in cash when I could qualify for 0% financing with excellent credit? That’s why credit, regardless of what some people will say, can give you leverage and opportunities that you wouldn’t necessarily have otherwise. The key is how we manage it, of course.
Advantages of a DMP
They work. They get you out of debt and can help you see a light at the end of the tunnel. They don’t kill your credit and they don’t cost you a fortune.
When you finally make the decision to seek help, a consumer credit counseling service is worth looking into. It won’t cost you a penny to get information and review your financial situation with a counselor. You don’t pay anything until you decide which option is right for you. They help you weed through the numbers and break them down so that you see exactly where you are and what your options are. For some, it may just be a matter of getting a better grip on your budget — and they help you see this. For others, like me, who are beyond the budgeting phase, a DMP would be a better fit. I didn’t have the funds to keep up so a DMP was the next best choice without ruining my credit or filing for bankruptcy. And finally, if it’s bad enough, they will help you see that bankruptcy is truly your only way out. Each person’s situation is unique — there isn’t one perfect solution, which is why it’s important to explore all of your options.
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A Success Story: 4 ½ Years & $30,000 of Credit Card Debt Gone
I’ll be the first to admit, picking up the phone and making that first phone call is painful. The person on the other line doesn’t know you, and going through all of your finances with a stranger can be uncomfortable and nerve-wracking. But finally seeing your financial situation in black and white is so worth it.
I was the one responsible for running up almost $30,000 in credit card debt, regardless of my reasons — whether from paying for a divorce or trying to make ends meet. It took me four and a half years, but I finally succeeded in paying off close to $30,000 in credit card debt. And I learned a few valuable lessons along the way:
- We all make mistakes, but that doesn’t mean we can’t find a solution to turn things around.
- None of us are invincible. The truth is, we’re all susceptible to financial mistakes in certain situations — it just depends on what that situation is. Being laid off, divorce, medical expenses for a child — you get the idea.
- Sometimes you have to experience the mistake yourself to heed the lesson, regardless of what you already know.
Image: adrazahl, via Flickr