Debt Management as a Consolidation Tool

It can be difficult to know what to do when you’re dealing with debt as it’s daunting to try to decide the best financial move for your household on your own. Trying to handle debt without guidance can even be an isolating experience for many.

Why is it so difficult to reach out for help with debt?

As one writer pens for The Atlantic, “Money troubles humiliate in a way few others do.” Put simply: It can be very difficult and uncomfortable to discuss money. Many people end up resisting help and suffering in silence — but asking for help can be one of the smartest and most empowering moves to make in your journey to debt freedom.

Where can you start?

Credit counseling agencies exist specifically to help consumers deal with debt issues and learn more about how to manage their finances. One particularly effective service these agencies offer is debt management.

Here’s more about debt management as a tool for debt consolidation.

Debt Management 101: The Basics

The first step is always scheduling an appointment with a credit counselor at a reputable agency. This meeting should be free and may happen in person, online or over the phone. After going through your budget and debts, a counselor can decide if you’re eligible for a DMP.

Upon enrolling in a debt management plan (DMP), your credit counseling agency will contact creditors to create a repayment schedule. As U.S. News & World Report notes, the timeline for a DMP usually ranges from three to five years. Certain creditors may be willing to reduce interest charges and fees as part of the agreement.

Next, you’ll be responsible for making a single payment to the agency by a certain date each month, which the agency will then pass on to your creditors accordingly. Some people find it’s simpler to make this single payment per month as opposed to trying to juggle multiple payments. They also appreciate the potential for reduced charges through negotiations handled by the agency.

Potential Downsides of Enrolling in a DMP

While DMPs absolutely do help some consumers pay back their debts with less interest — and with the advice of a professional on their side — there are, of course, some drawbacks to consider. This is true of any debt relief strategy.

Enrollees can expect to pay a start-up fee, as well as a monthly maintenance fee for as long as they’re signed up for the DMP. According to Experian, it’s pretty typical to see initial fees of $30 to $50 and monthly fees of $20 to $75, although the exact amounts will vary by location and agency. It’s important to factor in these fees when you’re deciding whether a DMP will help you save money — and how much.

Another challenge associated with DMPs is they usually require enrollees to stop using credit while participating in the program, or even close accounts altogether. Overall, you can expect to have less credit available to you than before — which is why budgeting is a very important aspect of committing to a DMP. If creditors see a new line of credit appear on your credit report, they may actually cancel any concessions they offered previously, like lowered interest rates or waived fees. In such cases, you might be better off considering a solution such as debt consolidation.

How to Choose a Credit Counselor

Your success under a DMP depends first and foremost on choosing a reputable, qualified credit counselor with which to work.

Here are a few questions to ask before enrolling, per the Federal Trade Commission:

  • What is the payment schedule under your DMP?
  • How can I check the status of my accounts?
  • How will you determine the amount of my monthly payment?
  • Will you negotiate with my creditors for better terms?
  • Which debts can I enroll in your DMP?

Debt management is a consolidation tool worth exploring, especially if you’ve been dealing with debt on your own and could benefit from professional advice.

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