It’s pretty rare that anyone gets excited about receiving their monthly credit card statements. But if opening yours fills you with more dread than going on a questionable Tinder date, it may be a problem. Perhaps it’s time you consider a helpful solution, like a debt management plan (and swiping left).
What Is a Debt Management Plan?
A debt management plan (DMP) is a monthly payment plan that you work out with creditors to help you pay off your debt. This can simplify your situation because it means you’re only making one monthly payment instead of trying to pay multiple credit accounts or anything else.
“While it does consolidate the monthly payments and lowers the interest rates and (usually) lowers the total payments, a DMP is not a consolidation loan or debt settlement,” Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said in an email.
While this may be a viable option to help you pay off your debt, it’s important to consider the effects it can have before you go down the DMP road.
How a DMP Affects Your Credit
You probably know that having missed payments or even maxed-out credit cards can be damaging to your credit, but a DMP also can cause your credit to take a hit.
“Debt management plans will initially ding your score slightly if the included accounts are not already closed,” Nitzsche said. “When you join a DMP, the accounts are automatically closed, which has the same effect as if you closed the accounts yourself.”
When you close accounts, your debt usage ratio may increase. Your debt utilization is the amount of your outstanding balances versus your available credit limits, and 30% of your credit score is based on the amount of debt you’re currently carrying. (You can see how your debt and payment habits are affecting your credit by pulling your reports for free each year at AnnualCreditReport.com and viewing two of your credit scores, updated monthly, for free on Credit.com.)
And unlike debt settlement, a DMP doesn’t require that your accounts be delinquent, so even with the debt ratio ding you might see, you’ll likely experience less of a negative affect than if you were to wait until you’re behind on payments to take action. Nitzsche said the damage DMP might cause is also much less than what you’d see for filing bankruptcy.
If you need a little extra motivation, consider using this lifetime cost of debt calculator, which can give you insight into how your credit score can affect the debt you’ll pay during your lifetime.
Essential Things to Know Before You Enroll in a DMP
“DMP’s work with unsecured debt, primarily credit cards,” Nitzsche said, adding that it’s important to remember that a DMP is most effective when your debt is still with the original creditor and not in collections.
Beyond that, he adds, “good payment habits and good communication with the counselor will be essential, or you could lose the benefits of the DMP.”