The nation’s credit card debt is on the rise, as consumers increasingly use plastic to cover their living needs in an inflationary economy, one that’s still emerging from a transformative pandemic.
And now, as the Federal Reserve again boosts interest rates to try to curb inflation, that debt is about to get even more expensive.
More and more, people are having to seek help for their growing debt. For many, that help is in the form of a debt management program, aka DMP, which is a way to erase high-interest debt without a loan. If such a solution seems right to you, here’s how to live with a debt management program.
What is a Debt Management Program
Also called a debt management plan, such a program essentially rolls credit card and other unsecured debts into a single payment and establishes a repayment plan of three to five years at a lower rate.
How Do DMPs Work?
Most people come to join a DMP after visiting with a credit counselor at a nonprofit agency accredited by the National Foundation for Credit Counseling. Usually, the counselor goes over the client’s financial situation and provides free help with budgeting and money management. But sometimes, when the situation is more serious, the counselor will recommend a DMP with affordable payments.
After you enroll in a program, a counselor will contact each creditor and alert them that, from then on, they will pay your bills on your behalf. The counselor may also get your creditors to lower your rate or monthly payment or waive late fees.
So, each month, you’ll pay the counseling agency, which will pay your creditors. You’ll also get a progress report so you can see where you are.
Note that while you’re in the program, you may be prohibited from opening or applying for new credit. You’ll also be required to close existing credit card accounts. And if your payments to the counselor are late, you could be booted from the program.
In terms of costs, you’ll typically pay a modest set-up fee followed by a nominal monthly maintenance fee.
Living with a Debt Management Program
To properly know whether you can live with a DMP, you’ll need to look at its benefits and drawbacks:
- Collections of correspondences will cease.
- You’ll get financial advice from a professional.
- The program can bring your accounts current.
- Making timely payments will improve your credit scores over time.
- You’ll have a realistic payment schedule that can make you debt free in three to five years.
- The plan helps to keep you organized and on time with your payments and bills.
- The program allows you to consolidate debt without taking out a loan.
- It allows you to skirt late fees that could compound your financial situation.
- You’ll likely have to pay some small fees, although some of those may end up being waived.
- There’s a chance that not all your creditors will go along with the plan. If that happens, you’ll be required to make separate payments to that creditor.
- You must make your payments consistently and on time.
- You won’t be permitted to access new lines of credit while you’re in the program.
- To avoid taking on more debt, you’ll be required to close your current credit cards.
Now that you know the ins and outs of living with a debt management program, you can more properly assess your situation to see whether such a program is right for you.