Debt management (also called credit counseling) is a booming industry these days as more and more consumers drown in credit card debt. With ads promising easy debt relief, these programs are tempting to anybody struggling to stay on top of debt. But are they legit? Will they help you or hurt you? Here are 10 things you need to know before working with a debt management agency—both pitfalls to watch out for—but also benefits you can expect.
Points to Watch Out For
1. Don’t Be Fooled By Non-Profit Status – Many debt management companies may be organized as a non-profit business—a fact they are eager to share to make it look like they are on your side.
The truth is these companies are still in business to make money; they may just distribute their earnings differently than a for-profit corporation. Debt management companies do charge for their services, usually as a modest monthly fee.
2. You May Be Able to Do It Yourself – Much of what debt management companies do involves simply contacting your creditors and negotiating alternative repayment plans, hopefully with reduced interest rates and fees. If you are struggling to make payments, you can usually do this yourself. Most creditors will be eager to help you meet your debt obligations because they want to help you avoid bankruptcy, which sucks for them. Talking to your creditors directly isn’t pleasant, and it may not be easy, but it can be done.
3. Your Credit Score May Drop – A lot has been written about how debt management programs hurt your credit score. That is not always the case. If you have several late payments or are currently way behind on any credit payments, chances are debt management may actually improve your score.
If you have loads of debt but are current on all your payments, your credit score may drop when you enroll in debt management. That’s because as your debt management company renegotiates your credit obligations, they may change when payments are made to creditors, resulting in late payments being reported on your credit history. Additionally, many creditors will close your accounts while you are in debt management, and good history you have with those accounts will be taken off your credit history.
Regardless of whether your credit score goes up or down in the short term, enrolling in a debt management program is a long term decision, and the fact is repaying your debts is the best thing for your credit score. It is certainly better than continuing to be late—or not paying at all.
4. You Must Give Up New Credit – Once enrolled in a debt management program, you will be prohibited from opening new lines of credit. If you do, you will risk the benefits your debt management program has negotiated for you. While not opening new credit is generally the best move for you while you are trying to get out of debt, make sure you do not anticipate needing an auto loan, for example, during your repayment period.
5. It Doesn’t Take Effect Immediately – Once you have been enrolled in a debt management program, it can take a month or before your creditors receive their first payment. This can mean two things.
First, if you want to avoid late marks on your credit report, you will need to make at least one month, possibly two months, of “double payments”: one payment to the debt management service and your regular payments directly to your creditors. Since most people cannot afford this, you must be prepared for the possibility of getting a late mark on your credit report.
Second, you may receive collection calls from your creditors before they receive their first disbursement from the debt management agency. Unfortunately the debt management agency cannot stop collection calls, but most collectors will be satisfied when you tell them you have enrolled in a program and will leave you alone once you inform them.
Benefits to Expect
6. Your Interest Rates Will Go Down – Once your debt management company makes contact with your creditors, most creditors will immediately lower your interest rate by several points, typically to a rate between 12% and 16%. This can be a huge help if you are paying 17% or more, and especially if you have been late on one or more accounts and are paying a default APR of 20% or more. These reduced APRs can save you thousands of dollars.
7. Fees Will Be Waived – Your debt management company may also be able to get your creditors to eliminate future late fees that might be incurred as creditors adjust your payment schedule, saving you as much as $40 per creditor each month.
8. You Will Have One Monthly Payment – One simple benefit of a debt management program is the ability to consolidate your debt payments into one monthly payment. (The debt management service then distributes your payment to your creditors).
9. You Avoid Bankruptcy, But Retain the Option – Nobody wants to declare bankruptcy, and it is true debt management provides a viable alternative to becoming legally destitute. However, enrolling in debt management or credit counseling is actually a prerequisite to filing bankruptcy. So even if you find yourself still unable to pay all of your creditors, bankruptcy is then an option for you after you have tried debt management.
10. Your Debt Will Be On Autopilot – Once you have enrolled in a debt management plan, and if you let your debt management plan pay all of your creditors each month, you may never have to worry about your debt again. Your payment is auto-debited from your bank account, and your debt will be gone in just a couple of years. Of course, it is smart to allocate more money to your payments whenever you are able, but that is just a matter of logging onto your debt management company account page and increasing your payment.
If you think a debt management program could help you, I encourage you to get all the facts and do your research before you sign up for any program! These programs are a lifesaver for some, but for others they can do more damage than they do good. One company I have had personal experience with is CareOne Credit Counseling.
Have you or someone you know used a debt management agency? What was your experience? Did they help?