When Credit Card Debt Management Plans Can Go Wrong
It seems that every other commercial on television is for some form of debt relief and the ads that outnumber the rest are for consumer credit counseling services. These services offer consumers in debt the opportunity to enroll in a credit card debt management plan. As with any advertisement, this service boasts the best results, but do not let this fool you. The most important thing to remember when dealing with your debt is that it is uniquely yours and there is no one size fits all resolution. Depending on your personal habits and financial circumstance, enrollment in such a plan may hurt you more than help you.
And there is usually a better option available:
What is a Credit Card Debt Management Plan?
A credit card debt management plan or DMP is a program a borrower can enroll in to regulate their monthly payments. The counseling service negotiates with your creditors to establish lower monthly payments and interest rates. The debtor makes one monthly payment to the DMP that is then dispersed among the multiple creditors. With a DMP the entirety of your debt is to be paid off over time.
Possible Pros and Cons of a Credit Card Debt Management Plan
This is a general overview of advantages and disadvantages of DMPs. What may be viewed as an advantage for one consumer could be seen as a disadvantage for another.
- Potentially lower monthly payments
- Decreased interest rates negotiated by the DMP
- Only one payment each month
- Still responsible for entire debt
- Could show up on credit report
- Credit accounts are inactivated
- Monthly fees to the servicing company and possible upfront fees
- Prohibited from opening any new line of credit
- Rigid Payment Schedules
- Only Unsecured Debt allowed
- High Drop Out Rates
- Takes too long
- Widespread Fraud and Scams
Putting the Pros and Cons in Perspective
For some, participation in a debt management program is appealing because of the possibility of one monthly payment that is lower than what they are currently making on their bills combined. Debt management companies are able to offer a lower monthly payment because they negotiate with creditors for lower interest rates. But because participation in a DMP is voluntary for creditors, a lower monthly payment is not guaranteed.
The average American cardholder has 3.5 credit cards. A majority of cardholders do not have multiple cards for luxuries but instead use them for basic necessities. If you enroll in a debt management plan, not only may you have to close your credit accounts, you are also typically no longer allowed to open any new lines of credit. This means that if you enter a DMP, you must not only have money available to pay for monthly necessities, but for possible emergencies as well.
Although having participated in a debt management plan itself may or may not significantly damage your credit score, the requirement of closing your current accounts can certainly have a negative impact. This is because a percentage of your score depends on the length of your credit history.
Debt Management Programs come with very rigid payment plans. Regardless of your financial situation, you cannot miss a payment or pay less than what has been agreed upon. These strict requirements often lead DMPs to have high dropout rates.
If you do choose to participate in a debt management plan, it is crucial that you select your service provider carefully. It is not unheard of for debt management companies to make late payments to creditors. When this happens, the consequences fall squarely on your shoulders because your payment amounts could increase and your credit score could be damaged.
Is a Debt Management Plan For Me?
To be sure, debt management plans are not an option for everyone. Enrollment in a DMP can be as much self-management as it is counseling. When you are enrolled you MUST make your payments on time. You also must be careful to choose a reputable company that will make your payments on time.
When dealing with debt, picking the debt management plan that is best for you can be difficult. McCarthy Law provides attorney negotiated debt settlement as an alternative to debt management plans. We negotiate large reductions in debt without bankruptcy. Contact us today to schedule your free consultation with a lawyer.