Debt management plans are one of the best-kept secrets when it comes to debt relief solutions. Because these plans are offered by nonprofit credit counseling agencies, they aren’t advertised as heavily as for-profit options like debt settlement. Often, people learn about debt management plans through word-of-mouth from people they trust who have paid off their credit card debt on a plan. If you’re just learning about these plans for the first time, you may be wondering what the pros and cons of debt management plan are. Let’s find out.

PROS

Lower Interest Rates

Credit counseling agencies have established relationships with creditors that allow them to secure extremely low interest rates for their clients. These rates are lower than anything consumers can typically negotiate on their own or through creditor hardship plans. And these lower rates remain in effect for the life of the plan, which means clients on debt management plans save thousands in interest and pay off their debt much more quickly — usually within 60 months and many in an as little as two years.

Single Monthly Payment

In addition to saving money and time paying off debt, debt management plans offer unmatched convenience. Once a client enrolls in a debt management plan, they make one monthly plan payment to the credit counseling agency. Then, the agency disburses that payment to the enrolled creditors. It’s much easier and more efficient than juggling multiple credit card payments each month. Plus, it ensures creditors receive payments on time.

No More Collection Efforts

If you already have accounts in collections at the time you enroll in a debt management plan, you’ll be glad to know that once you’re on the plan, creditors and collection agencies agree to stop collection efforts. If you still receive creditor calls or texts, simply let them know you have enrolled in a debt management plan and one of the agency’s team members will handle that contact going forward.

Peace of Mind

Worrying about how you’re going to pay your bills every month can take a toll on your physical and mental health. Being on a debt management plan provides priceless peace of mind. As long as you make your payment every month — which can even be automated for greater convenience — you will know your bills are being paid. And each month you stay on the plan brings you that much closer to your goal of being free of the burden of credit card debt.

Improved Credit Over Time

Many clients find their credit is the best it’s ever been by the time they finish a debt management plan. That’s because the consistency  provides month after month of on-time payments and decreasing credit utilization. Clients who complete debt management plans are free to pursue other major financial goals, such as purchasing a home or saving more for retirement.

CONS

Close Credit Accounts

Part of being successful on a debt management plan is the willingness to give up relying on credit cards and adjusting to a cash-only lifestyle. This can be a big change for those who have grown accustomed to using credit cards as an extension of their income. The result is worth it, though. We often have clients tell us living on a budget and paying with cash is a way of life they plan to stick with, even after they complete the plan.

Unsecured Debts Only

Debt management plans are designed to address unsecured debt — specifically credit card debt. If you’re struggling to meet obligations from other types of debt, like a mortgage, car loan or court-ordered support payments, a debt management plan can’t help with those debts directly. However, simplifying your unsecured debt with a debt management plan can help free up money in your budget to put toward other payments so it’s still an option to consider.

Possible Dip in Credit Score

Some clients may experience a dip in their credit score when they initially sign up for a debt management plan. That’s because most creditors require debt management plan clients to close their accounts so they can’t accrue additional debt. This shouldn’t be cause for alarm, however. Your credit score will steadily improve during your time on the plan thanks to on-time payments and a shrinking credit utilization rate.

Now that you’re more familiar with the pros and cons of debt management plans, you can decide if it’s an option you’d like pursue. Get started now by taking our free financial review.