Who Could Benefit From A Debt Management Program?
If you’re struggling with credit card debt or any other unsecured debt, then a Debt Management Program might be a practical and welcoming option for you. People often ask us this question: “Who could benefit from a Debt Management Program?” The obvious answer is: “Anyone who has unsecured debt”, but that could be a little harder to define than you might think.
A Debt Management Program (DMP) is an affordable and relatively stress-free way to recover from your debt in as little as 3 to 5 years. It’s also known as a Debt Repayment Plan by some agencies. With a Debt Management Program, you typically need to have Unsecured Debt. Unsecured debt means that it’s from credit cards, retail store accounts, medical bills, collection agencies, or other debts that don’t involve any collateral.
It’s really important, and even mandatory, that you go through Credit Counseling first, and speak with a certified credit counselor before you decide if a Debt Management Program is right for you. No matter what your current financial situation is, the first step is to speak with a counselor about a credit counseling session or complete an online credit counseling session.
Examples of who could benefit from a Debt Management Program:
When going through your credit counseling session whether it’s in-person, online, or over the telephone some of the topics that will be discussed are:
- Can Only Afford Minimum Monthly Payments – Debt Management might be a good option for someone who is struggling with making their minimum payments each month. If you can only afford the minimum payments, it could take you up to 20 years to pay it all off. By going this route, it means that your payments go mostly to interest and barely touch the principal balance at all. This is a vicious and never-ending cycle that you don’t want to be caught in.A Debt Management Program could lower your interest rates and monthly payment amount, so more of your money would go towards the principal balance and not the interest. This will allow you to pay off the debt much more quickly; usually within 3 to 5 years.
- Past Due on Credit Card Bills and Getting Hit with Fees – Past due means no payment was applied to your account as of your last due date. When your account is past due, you are subject to multiple late fees, interest rate increases, and possible suspension of your overall credit. You might not be able to use that credit card again until you bring the payments up to date, and maybe even pay off the entire balance. We all know that a late payment can hurt your credit score, but it’s also a warning sign of a serious debt problem. You get hit with a late fee or maybe even a few of them and bad things start happening. This will increase your total balance and the creditor will be able to charge a higher monthly payment, because the interest is now being calculated on the full balance that just increased because of the late fee. You can easily see how fast this problem can spiral out of control and get out of hand rather quickly. You might also get hit with punitive interest rates. A punitive interest rate is an increased interest rate that is assessed to a debtor who has violated one or more terms of an agreement. The rate increase typically follows non-payment for at least one billing cycle.
- Can’t get Ahead Because of High Interest Rates – If you keep paying your bills on-time every month, but it seems like the balance never really goes down, it’s probably the High-Interest Rate that’s to blame. If you have credit cards with high interest rates such as 24% or even 27% then the majority of your payment is only going to pay off the interest. You are barely touching the principal balance unless you pay way more than the minimum amount. It can be hard to make any progress or get ahead when trying to pay off high interest debt.On a Debt Management Program, most if not all of your creditors would lower your interest rates, and even waive fees such as late or over-limit fees. When your interest rates get lowered, more of your money is applied to the principal balance. This means you’ll get out of debt faster and also save thousands of dollars.
- Receiving Collection Notices and Collection Calls – A Debt Management Program would also be beneficial for someone that is a little behind on their payments and receiving collection calls from their creditors. If you’re constantly being called or hit by late fees or over-limit charges, entering a debt management plan may stop all of that from happening.When you enroll in a Debt Management Program, the credit counseling agency deals with your creditors and collection agencies for you. All harassing phone calls should cease, and if you are still receiving calls, just let your agency know about it. They will handle it from there. A Debt Management Plan can save you time, money, and ease frustrations.
- Maxed Out Credit Limits on Cards – Credit cards always come with a credit limit. That limit is the maximum amount you can charge without incurring a penalty. A warning sign of financial trouble is often maxed out credit cards or cards that are close to being maxed out. Very bad things can happen when your credit card balance approaches or even exceeds your credit limit. Some of these bad things include: your credit score dropping, new lenders will not lend money to you, you risk additional fees and penalties, and the balance will go up because of fees and interest. A Debt Management Program could help you get everything under control and start tackling those balances, and even eliminate those penalty fees.
- Considering Debt Settlement or Debt Consolidation Loan – Many people look towards Debt Settlement or a Debt Consolidation Loan as a quick fix to their debt problems. They may not understand the logistics of these types of debt relief options. There can be positives and negatives to both of these. With a Debt Consolidation Loan, you are basically moving your debt from one place to another. You should not attempt to pay off debt with another debt (loan). You really aren’t getting to the root of the problem or fixing anything. Debt Settlement also has some drawbacks and should be thoroughly researched and discussed. Debt Settlement will have a negative effect on your credit score that may be hard to bounce back from. Some Debt Settlement companies may charge a large fee up front. You also may have to pay taxes on the portion of debt that was settled when you go to file your taxes.
- Considering Bankruptcy – A Debt Management Program is a much safer alternative to other debt relief options such as Chapter 7 bankruptcy and Chapter 13 bankruptcy. A Chapter 7 bankruptcy stays on your credit report for up to 10 years. That’s the longest “shelf life” of all debt relief options. You will also experience a decent sized credit score drop because of the Bankruptcy. Bankruptcy should be looked at as an absolute last resort type option. It does wipe out the debt fast and completely, but it comes with its own stigma and problems. Lenders will be able to see that bankruptcy for years to come and base their decisions for approval on that factor alone.
- Looking into a Home Equity Loan to Pay Off Unsecured Debt – Home Equity is the difference between what your property is worth and what you owe on it. It’s a representation of how much value you possess in your home. Some people might consider taking out a Home Equity Loan or Line of Credit to deal with their debt problems. We already mentioned that it’s not a great idea to pay off debt with another form of debt (home equity loan) because you are just shifting the problem from one place to another. Also, remember that a Home Equity Loan puts your house at risk if you can’t pay it back. This can be very dangerous and risky.
- Forced to Use Credit Card for Everyday Small Purchases – There is a difference between using your credit card for everyday small purchases such as gas or groceries for convenience, and being “forced” to use that card because there’s not enough money in the bank account. If you can pay off the balance in full every month, then it’s perfectly okay to use a credit card and maybe get some cash back bonus points or reward points. It’s not okay when you are required to use a credit card for things like gas, groceries, or cigarettes because you don’t have enough money in your bank account to cover those expenses. That means you may have a serious debt problem and need some help.
- Recent College Graduates with Credit Card Debt – Between ballooning student loans, credit card debt, and money owed to friends and family members, recent college graduates are facing an average of $36,500 in college-related debt right out of school. One good thing is that the Credit Card Act of 2009 eliminates excessive marketing to young people. Anyone under the age of 21 must prove that they have independent income or get a co-signer before applying for the card. This helps to prevent the amount of time a young person can use that credit unwisely.
- Life Events that Make it Hard To Pay Off Debt – Sometimes we go through some major life events that prevent us from paying off debt or make us accumulate even more debt. Some of these may include: Medical Injury or Disability, Divorce, Graduating from College, Job Loss or Reduced Income, Death in the Family, New Baby, Marriage, Retirement, and Buying a Home. Starting a Debt Management Program will help relieve some stress and get your finances under control so you can deal with the new major life event that you are faced with.
- Inability to Save Money Because of Debt – Another warning sign of financial distress is the inability to save any money because of debt obligations. People often say they can’t save any money because they have nothing left at the end of the month. So instead of trying something different (budgeting and making cut-backs) they continue to live paycheck-to-paycheck and never save.
The problem with that is “Life Happens!” Emergencies and other unexpected things can throw a wrench in your finances, and if you don’t have any money saved up for these emergencies then most likely you’ll use credit cards to pay for them. You’ll dig yourself even deeper in debt and depending on what the emergency is you may never see a way out. One of the most important things you can do is to start an emergency savings fund and don’t touch it unless there’s a true emergency (paying off debt doesn’t count).
- Tried to Contact Creditors on Your Own With No Success – Some people try the “DIY” approach with their debts and contact the creditors themselves to ask for help. Remember, your creditors are not legally obliged to make any special arrangements with you, nor are they required to abide by them. Their ongoing cooperation is completely voluntary. Creditors will keep a record of the information you have provided regarding your current financial situation. They or other lenders may refuse to extend you credit or may limit your credit in the future.
Sometimes it can feel like you can’t see the light at the end of the tunnel. But many people can become debt-free by being responsible and signing up for a Debt Management Program from a reputable credit counseling agency.
There are a number of less obvious benefits to a Debt Management Program, such as learning to use and maintain a household budget, living without being dependent on credit cards, not having to worry about your creditors or collection calls, and learning the importance of paying more than the minimum payment each month. The most obvious benefit would be saving time and money while you’re on the right path to becoming debt-free!