Making the most of a debt management plan (DMP) to lower the interest rate on your credit card loans and reduce the monthly payments you make can appear like an awesome solution. However, such a plan is not without its shortcomings also. Essentially, determining if a debt management plan is the most suitable thing to do depends on your individual financial position.
Before you opt for a debt management plan, it is helpful to know the major advantages and disadvantages of such an undertaking.
Advantages
Multiple Monthly Payments Are Condensed Into One
A debt management plan enables the borrower to consolidate their multiple loan payments every month into one monthly payment, which is made to their credit counseling agency.
Then, the credit counseling agency remits the payments, which are forwarded to the lenders on your behalf. Such an arrangement is necessary if you are operating multiple accounts or have a hard time following the deadlines.
One payment every month means you do not have to try to follow a complicated payment schedule or deal with the stress that comes with late payment penalties.
Provided you are paying your credit counseling agency on time, you can rest easy and continue with your duties for the remaining days of the month.
May Provide An Opportunity To Reduce Your Interest Rates
Restructuring processes for debt management plans may involve the credit counselor negotiating reduced interest rates for you.
It is worth remembering that credit card debts are unsecured debts, and the high interest rates they attract can substantially inflate your monthly payments. Fortunately, the opposite is true: reduced interest rates imply reduced monthly payments.
May Offer A Chance To Save A Large Amount Of Money
A debt management plan may open the door for negotiated terms and reduced interest rates to help an individual borrower pay off their loan within three to five years.
When these two factors—a reduced interest rate and a faster repayment period—are simultaneously taken into account, the borrower’s savings over the loan duration can be tremendous.
The Credit Score May Start To Improve After Sometime
A debt management plan is not an assurance that your credit score is going to rise. However, many borrowers who opt for a debt management plan tend to see their credit score go up by 62 points on average over a period of two years.
Such an improvement can happen because a debt management plan helps the borrower make consistent payments and lower their debt burden rapidly, which are some of the main factors that boost the credit score.
Shortcomings
Your Credit Card Accounts Are Closed
The borrower’s credit card accounts must be locked for all credit cards in the debt management plan. This measure ensures the borrower is not racking up additional debt while also trying to pay down the existing debt.
Simultaneously, closing the borrower’s accounts makes sure they are relying on the lower interest rate and terms of the debt management plan for their correct objective. This means that if the borrower has a credit card that has not been included in the DMP, they are discouraged from using it unless there is an emergency.
The lenders included in the borrower’s DMP can keep track of your spending patterns. If they detect that you have incurred additional debt, they may have to close your account.
The Can Only Enjoy The Benefits Of The Plan If You Make Consistent Payments
The only way you can enjoy and maintain the benefits you get from a debt management plan, such as reduced monthly payments or lower interest rates, is to ensure you pay the required amount without fail.
If you are not consistently making the payments, you risk losing the plan’s benefits. For this reason, debt management plans are best suited for individuals who are dedicated to improving their financial position and perform their responsibilities consistently under the management plan.
Plan Not Not Applicable For All Creditors
Although many creditors take part in debt management plans, others do not. The credit counseling agency does its best to secure more favorable terms for the borrower; however, the benefits and revised terms can only be issued by the lender.
Even though it is not common, one or multiple creditors can decline to take part in the plan, and in the event this happens, a debt management plan may not be the best course of action.
Thank you,
Glenda, Charlie and David Cates
