If you're up to your ears in debt, a debt management plan through a credit counseling agency can help you dig your way out of a financial black hole. Before you sign on for a debt management plan, though, you should understand how these programs work, and be certain that you are working with a reputable credit counseling agency. Otherwise, you could find yourself in even worse financial trouble.
How a Debt Management Plan Works
Debt management plans allow you work with a credit counseling agency to restructure your debts in order to lower your payments and interest. Most plans develop a plan to help you pay off most or all of your debt within a three-to-five year period. Your credit counselor negotiates with your creditors on your behalf, and instead of paying each creditor separately, you make one lump-sum payment per month to the credit counseling agency, who, in turn, pays your creditors.
Choosing the Right Credit Counseling Agency
One of the biggest disadvantages of a debt management plan is choosing a credit counseling agency that is not trustworthy. Some debt-management programs can charge upfront fees as high as 3 percent of your total debt, according to Bankrate's Lucy Lazarony. In order to choose a reputable credit counseling agency, check with the National Foundation for Credit Counseling to find a licensed, non-profit credit counseling agency in your area (see Resources).
Agreeing to an Impossible Plan
The goal of a debt management plan is to make your debt more affordable. However, if you agree to payments that are too high, you are setting yourself up for failure. A reputable credit counselor will work with you to create a budget before you agree to a plan. If you feel that a credit counselor is pressuring you to agree to a monthly payment that is too high, it's a good idea to find another agency to work with.
Changes to Your Credit Report
Sometimes, a debt management plan can have a detrimental effect on your credit score. If you've paid your bills on time in the past, a debt management plan could negatively impact your credit report if creditors indicate that you are no longer paying your debt as agreed. For many who use credit counseling and debt management plans, though, this will not make much of a difference since there credit is already in bad shape. However, if you have excellent credit, the affect on your credit report is something you should discuss with your credit counselor.
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