The Last-Ditch Way to Pay off Credit Card Debt

You’ve tried extreme budgeting, maybe even a balance transfer and almost every pay-down method around. But your outstanding credit card debt remains insurmountable. There is still another way, and it’s not debt settlement, which essentially stiffs your lenders and can decimate your credit score.

A debt management plan, or DMP for short, administered by a certified credit counselor can get you back in good standing with your credit card issuers, eliminate your debt in a manageable way, and help improve your battered credit score.

Here’s what you need to know about a DMP and whether it’s right for you.

What is it and how does it work?

A DMP is a budget-friendly way to pay down your outstanding credit card debt or other unsecured debts by making one monthly payment to a credit counseling agency, which distributes the funds to your creditors on your behalf. Secured debts like car loans and mortgages don’t qualify.

The credit counselor first negotiates with your creditors to come up with a lower monthly payment for each of your outstanding balances based on your budget. Your interest rate is typically lowered as well, usually by a substantial amount if you were paying a penalty rate. The total balance you owe, though, remains the same.

The lower payments remain at that level until your debt is paid off in full. Typically, DMPs last 36 to 60 months. A point to remember: Once you’re enrolled in a DMP, you can no longer use the credit cards that are part of the plan.

What are the benefits?

Besides a more affordable monthly payment, DMPs come with other advantages. Often, finance charges, late fees, and over-the-limit fees you’ve already incurred are reduced or waived as part of the plan. You will get fewer collection calls if the accounts in the DMP were severely past-due before. Enrolling in a DMP also has an indirect, positive impact on your creditworthiness. After making a handful of payments, creditors will start reporting any past-due accounts as on-time again to the credit bureaus—even if you haven’t paid back any past-due amounts. That will have an immediate, positive impact on your credit score.

“That helps consumers get back on track for their credit health,” says Bruce McClary, the spokesman for the non-profit organization National Foundation for Credit Counseling and a former credit counselor himself. Still, the road to a significantly better score is long, especially if you had been missing payments.

Is a DMP right for you?

You can’t enroll in a DMP without the recommendation of a credit counselor. Reach out to one as soon as your debts become unmanageable, says McClary. Find a reputable nonprofit credit counseling agency by contacting your state consumer protection agency or by using NFCC’s look-up tool to schedule an initial session with a counselor by phone, online or in person.

In the initial session, the counselor will ask about your personal finances—income, debts and other financial obligations such as housing payments—as well as the circumstances that are making it hard for you to pay your credit card bills. Based on that information, the counselor will come up with a personalized budget and offer options to resolve your financial difficulties. A DMP may be one of those recommendations.

The credit counselor also serves as your point person during the lifespan of the DMP. If your circumstances change drastically due to a job loss, divorce, or other life event, the counselor can develop a new budget, making critical adjustments to reflect your current situation. They also can work with your creditors and refer you to additional services, such as job placement, to get you back on track.

What does it cost?

A DMP is not free. The average cost for the initial session is between $30 and $50, when charged. Some nonprofits may offer it at no cost. But most agencies will collect a monthly service fee between $25 and $60 for the DMP, which is added to your monthly payment. That means the agency could collect between $900 and $2,160 for a 36-month DMP. But fees vary by agency, state and a consumer’s ability to pay.

The fees are also offset by the elimination of late and over-limit fees, lower interest rates and savings from lower monthly payments, says McClary. “It’s important for consumers to understand exactly what they are getting for that fee and whether they feel it’s appropriate for the services provided,” he says.

Why not just settle the debt?

You may be tempted instead to settle the debt for less and get out of the red sooner. But debt settlement or consolidation comes with major drawbacks, according to the Consumer Financial Protection Bureau.

Cost: Debt settlement services typically charge hundreds to thousands of dollars in upfront fees and thousands in servicing fees. That doesn’t count any built-up late fees and penalties you may pay if any debt remains unsettled.

Credit: To begin negotiations with lenders, debt settlement companies often encourage you to stop paying your bills altogether so they go to collections. This is bad for your credit. Additionally, a settled debt itself damages your credit score, because it shows you didn’t fulfill your debt contract.

Relationship with creditors: Some creditors refuse to work with certain debt settlement companies. But creditors are more open to DMPs because they eventually get paid in full.

Success rate: In many cases, the debt settlement company can’t settle all of your debts, according to CFPB, leaving you on your own. A crop of studies also found that half to two-thirds of consumers enrolled in a debt settlement plan cancelled within two years. McClary says the success rate of DMPs is between 70% and 80%.

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