Debt Consolidation

The Pros & Cons of Debt Consolidation via a Debt Management Plan

If used properly, debt consolidation achieved through a Debt Management Plan, can help you regain control of your debt. This benefit can systematically pay off your debt through a convenient, single monthly payment. However, not everyone is a candidate for a Debt Management Plan. The following information will help you determine if this debt consolidation approach is right for you:

The primary aim of a Debt Management Plan is to help you achieve debt consolidation by reducing interest rates. However, creditors will not remove late fees or over limit fees. Lowering interest rates via this procedure usually doesn't help people that have a severe financial hardship or income loss.

When you enroll in a Debt Management Plan, creditors will require you to close the enrolled accounts. Any accounts with annual interest rates under 15% will generally not be eligible for enrollment. Also typically ineligible are collection accounts, medical accounts, most credit union accounts, auto loans, mortgage loans, and pay day loans. Some creditors, such as American Express, Dell, and American General do not participate in Debt Management Plans.

NEVER Miss a Monthly Payment

If you decide to join a Debt Management Plan, you must consistently make your payments on time. If you miss a monthly payment or drop out of the program, the original interest rates and fees will be reapplied to the account. Missing a scheduled payment may also cause a creditor to drop you from the program. In which case, Capital One has a 12 month waiting period before you can reapply, HSBC has a 5-year waiting period, and American Express will ban for life.

How Your Credit Is Affected

If you make a late payment prior to, or while enrolled in a Debt Management Plan, it will remain on your credit report. Although a Debt Management Plan does not affect the FICO score, creditors are likely to report the enrollment in a Debt Management Plan to the major credit bureaus. As a result of this negative credit report annotation, prospective lenders can deny you credit.

Is Debt Consolidation Right for You? Take the Test...

The objective of a Debt Management Plan is to reduce your existing minimum payments by a low of 2.2% to a high of 3.2% of the actual debt. For example on a $12,000 debt, at best you minimum payment can be decreased to $264 (2.2%). At worst, it can be decreased to $384 (3.2%). Thus, if you need to lower your minimum payment well below 2.2% of your total debt, a Debt Management Plan will not be an appropriate solution to your financial situation.

In conclusion, debt consolidation via a Debt Management Plan should only be considered if you only need basic interest rate reduction.

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