Debt Management Vs. Credit Counseling

Credit counseling and debt management plans are not necessarily separate entities. They may co-exist, as debt management is one of several options a credit counselor may recommend. For those who feel they are over their heads in debt, credit counseling is an option. It's important to use a reputable credit counseling organization recognized by the National Foundation for Credit Counseling.

Credit Counseling

Only a credit counselor can recommend that you utilize a debt management plan (DMP), if you are applying the standard financial definition of debt management. Therefore, you must obtain credit counseling before choosing to pursue a DMP. Reputable credit counselors don't just work with you to clear your debt, they also help you determine how you got into financial trouble and help create a budget that will provide a level of financial freedom. Credit counselors should present you options for debt relief, such as simple budgeting, debt consolidation loans or DMPs.

Debt Management Plan

Your credit counselor may present the option of a DMP if you have defaulted on your accounts or if you have difficulty making monthly payments. Debt management involves restructuring your debt and helping the debtor manage his payments to solve his debt issues. When you sign up for a DMP, your credit counselor contacts your creditors to try to negotiate lower interest rates or a reduction in payoff balances. You agree to a payment plan that requires you to make monthly deposits to the credit counselor, who distributes payments to your creditors over a specific time frame -- usually 48 months or more, according to the Federal Trade Commission. At the end of that time frame, your debt will be paid off if the plan is followed.

Warnings

Do not confuse DMPs with debt settlement or debt negotiation. The Federal Trade Commission does not recommend using these latter two services, as they often charge high fees and sometimes increase your overall debt. Some of these companies force your accounts into default status by holding onto your payments until the creditor agrees to lower your payoff balance. This action causes your credit score to plummet, and you may incur significant late fees. In most cases, you can pursue debt settlement or debt negotiation strategies yourself.

Considerations

While a professional counselor can help, you can help yourself by getting your credit card interest rates as low as possible and ordering your credit report to review your credit profile. You can call your creditors directly and ask whether they can lower your interest rate or provide some other payment modification. Creditors will consider this only if you are delinquent on you account payments and can show that making the minimum required payments is difficult. You can order a free credit report from each of the three credit bureaus once each year through the AnnualCreditReport website. A credit report shows all your credit activity, and it enables you to determine what activity is hurting your credit rating. If there are inaccuracies on the report, you should dispute the items with the credit bureau to have them removed, because mistakes can damage your credit rating.