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How Do Credit Card Debt Management Plans Work?

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SAN JOSE, California, May 11, 2021 / PRNewswire / – When you’re struggling with credit card debt, increasing balances on your monthly statements and collection calls can increase your anxiety. However, you are not alone with your creditors. Many credit counseling agencies offer Debt Management Plans (DMPs), which allow an advisor to act as an intermediary on your behalf.

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How Do Debt Management Plans Work?

Credit counseling agencies offer many services aimed at helping consumers manage their personal finances. A DMP is specifically intended to help people overwhelmed by unsecured debt. Secured debts, such as car loans and mortgages, generally cannot be part of a DMP.

  • A single, consolidated payment. After you start a DMP, you will make a one-time payment to the credit counseling agency, who will then pass the appropriate amounts on to your creditors.
  • Potentially lower payments and fees. Your advisor may be able to negotiate lower interest rates, lower monthly payments, and fee waivers for your enrolled accounts.
  • Bring up-to-date accounts. Your creditors can also agree to update overdue accounts without you having to pay the entire balance at once. You can then make on-time payments that help your FICO® Scores over time and debt collectors may stop contacting you about these accounts.
  • A plan to pay off the debt. The goal is to make your monthly payments more manageable and pay off included debts within three to five years.

You may need to agree to certain conditions to be eligible for a DMP. For example, you may need to close or stop using all of your credit cards while you are enrolled in DMP. Although, sometimes you can keep a card open for emergencies.

There is also often a one-time setup fee and a monthly fee to participate in a DMP. Fees can vary depending on the agency and your state, and could be more than offset by the savings your advisor negotiates. Agencies may also offer waivers to low-income applicants.

When Should You Consider a Debt Management Plan?

A DMP might be a good choice if you’re struggling to pay your credit card bills and living expenses, but can afford to pay something every month. There is no income or FICO® The score requirement, and you might consider contacting a credit counseling agency to discuss a DMP if:

  • You are late or have problems with credit card bills
  • You don’t know how to manage your living expenses and debt
  • You want help negotiating with your creditors
  • You can’t afford the lump sum payment to settle overdue accounts
  • Collection agencies won’t stop calling you

How Debt Management Plans Can Impact Your FICO® Notes

Once you’ve signed up for a DMP, your creditors can add a note to your account that says you’re working with a credit counselor. The notation will have no impact your FICO® Scores, although other creditors can see it on your credit reports.

In addition, the actions you take while participating in the DMP may have an impact on your FICO.® Scores in different ways:

  • It may be easier to make payments on time, which can help you create a payment history.
  • Updating overdue accounts could help you avoid new late payments that could otherwise hurt your FICO® Scores.
  • Closing your revolving accounts may have an impact on your rate of use of revolving accounts.

In the long run, paying off your balances may also be better for your FICO® Scores that settle a debt for less than the full amount.

How to get started with a debt management plan

If you think a DMP could help you better manage your credit card debt, the first step is to contact a reputable credit counseling agency.

You could look for an agency it’s part of the FICO® Score Open Access for Credit and Financial Advisory Program, which allows your advisor to share your FICO score with you for free. the National Foundation for Credit Counseling can also be a good starting point.

You will then have a one-on-one meeting with a credit counselor from the agency to review and discuss your personal finances. The initial meeting is often free, and you may want to meet with counselors from multiple agencies to compare their DMP suggestions and cost. After careful analysis, the advisor can share the pros and cons of different options, including budgeting, bankruptcy, or a DMP.

When a DMP is right for you, you will work with your advisor to determine which accounts to include. Your advisor will then contact your creditors with a proposal. Creditors are not required to accept a DMP, but they may be open to it if you are unable to pay your payments otherwise.

You will then set up your payment with the credit counselor, as you will now be paying them rather than your creditors directly. However, you may need to contact your creditors to change your account due dates to align them with your DMP payment.

Once you leave, your consolidated monthly payment could stay the same for the duration of the DMP. As you pay off your accounts, your advisor can redistribute the money to your other creditors, helping you get out of debt sooner and pay less interest overall.

Ideally, you can stay the course and pay off your debt in five years or less. However, contact your advisor immediately if you have difficulty affording a DMP payment. Your advisor can also help you review your debt management options that are not included in the debt management plan.

About myFICO
myFICO makes it easier to understand your credit with FICO® Scores, credit reports and alerts from the 3 bureaus. myFICO is the consumer division of FICO – get your FICO scores from the people who do the FICO scores. For more information, visit https://www.myfico.com.

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