Debt consolidation services, including those for credit cards, are usually handled through firms called credit counseling services. These services are meant to help you improve your overall financial situation by looking at how you can improve your money management. Your credit counselor will determine if consolidation through a debt management plan is the right course of action.
Counseling
A debt consolidation service first offers credit counseling. You'll work one-on-one with a credit counselor who will analyze your current financial situation and help you to develop better money management skills. The only way to qualify for a debt management plan is by the recommendation of a credit counseling service.
Services
According to the Federal Trade Commission, a reputable credit counseling service will thoroughly assess your financial situation and work with you to create a budget and a financial management plan before suggesting consolidation through a debt management plan. A credit counselor should offer you customized advice about your specific financial situation to help you to stop the cycle of debt.
Debt Management Plan
If your credit counselor suggests consolidation through a debt management plan, the counselor will get in touch with your creditors to negotiate ways to lower your balances and your interest rates, if possible. You then set up with the counseling company an account into which you make a monthly deposit over a predetermined period of time, from which the company pays your creditors.
Considerations
Simply having a debt management plan listed on your credit report doesn't bring your score down, but it is seen as a negative mark because the negotiations with your creditors mean you're paying back less than you owe. Also, some people on DMPs suffer from sinking credit scores because the credit counseling service does not pay the creditors on time. Check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling to see if your credit counseling company is listed as a reputable service.
Other Options
Before taking on a debt management plan, consider your options for paying off your debt independently. One way to lower your overall payments is to ask for an interest rate reduction on your cards. Gather any credit card offers you've recently received to get a target interest rate, then call your creditor and speak to a representative about lowering your rate. Another option is to take out a consolidation loan, which usually requires collateral such as your home -- however, taking out a loan against yourself looks better on your credit report than a DMP. As with a DMP, though, it's vital to make a commitment to paying off your debt and keeping it off for good. Many people misuse consolidation loans by continuing to spend on their newly freed credit.
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