What is a Debt Management Plan, and How Does it Help?
First things first, a debt management plan is NOT a loan. However, it is a tool offered by nonprofit credit counseling agencies to get you back on the road to a financially stable, debt-free future. A dedicated NFCC certified credit counselor can also help you determine if entering into a debt management plan is the best option for you, and if not, lay out all your available options
Benefits of a Debt Management Plan
It’s time to get your bills back on track
When you work with an NFCC agency on a debt management program, you may benefit from reduced or waived finance charges or fees, fewer collection calls, and your accounts will be credited with 100 percent of the amount you send in. When you have completed your payments, the fact that you did repay your debt in full and according to plan, may help you re-establish credit.
How Does it Work?
First, an NFCC certified credit counselor helps set up a voluntary agreement between you and your creditors. People who sign up for a debt management plan make one lump payment each month to the nonprofit agency who then sends those funds directly to their creditors. Having a set monthly payment, that is now lowered, takes the pressure off of your budget and enables you to build your personal savings or even purchase your first home.
Sometimes all it takes is having someone walk through your situation with you and show you where to cut costs, help create a budget and bring hope with a plan for a better financial future.
How Debt Management Plans Impact Your Credit
Participating in a debt management program won’t have any negative effect on your credit score. Though there will be a note in your credit report that says you’re enrolled in a debt management plan, it’s not something FICO uses when determining a credit score.
Certain aspects of a debt management plan have a positive impact on your credit score. Your timely payment history, which accounts for 35% of a FICO credit score, will positively impact the score along with the decline in the amount you owe, which makes up 30% of the score.
Because you are involved in a debt management plan, there won’t be any inquiries for new credit, which is 10% of the score. Opening a lot of new accounts in a short period of time has a negative effect on your score. In the end, participating in a debt management plan will be a positive factor in terms of your credit.
Debt Management Plans vs. Debt Settlement
It’s important to know that these relief options are not the same. As a simple overview, debt management is carried out by nonprofit counseling agencies that help you lower your interest rates and monthly payments without affecting your credit score. Debt settlement can be a risky option that involves paying a for-profit company to negotiate on your behalf, but can affect your credit score while waiting for the company to negotiate a lower payment.
The Positive Impact of Debt Management Plans
Independent research from The Ohio State University has demonstrated the positive financial impact of financial counseling that accompanies a debt management plan administered by NFCC Member agencies. Most of these plans allow participants to repay all their unsecured debt within a period of only three to five years, thanks to the cooperation of creditors who can reduce interest rates and eliminate fees on the enrolled accounts.
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