- Debt management is a method of repaying debt in which you consolidate your debt and work with a nonprofit credit counselor to pay it off.
- In addition to paying off your debt in one monthly payment, you’ll learn how to incorporate healthy and sustainable financial habits into your life.
- Being aware of early signs of financial trouble could prevent you from getting into debt in the first place.
There are countless reasons why people get into debt. Perhaps you were hit with unexpected medical expenses years ago. Maybe you had a year or two with credit card spending that was out of control. Or perhaps you recently lost your job, which had a deleterious ripple effect on your finances.
The good news? If you’re in debt, you’re not alone. Over 80% of Americans hold some form of debt, according to the Pew Research Center. And we’re not talking about $1,000 or $2,000 — the average American holds around $38,000 in debt (excluding mortgages), according to a 2018 study from Northwestern Mutual.
If you’re determined to climb out of debt once and for all, you could benefit from debt management, a form of debt repayment in which a nonprofit credit counselor helps you pay off your debt while also teaching you about how to incorporate healthy financial habits into your life. Read on for key topics you need to know about debt management and why it might be a good option for you.
What Is Debt Management?
Debt management is a form of debt repayment in which you work with a nonprofit credit counseling agency to repay your debt. You will make one monthly payment to the agency, which they will use to pay off your creditors on your behalf. The agency might also be able to negotiate your balances down and secure lower interest rates on your debt.
In addition to helping you pay off your debt, nonprofit credit counselors will teach you about how to build good financial habits into your life so you don’t fall into the same trap again.
Typically, debt management doesn’t hurt your credit. In fact, the opposite is true. As you make steady payments to your credit counselor, you will most likely improve your credit score. Although you will likely be required to close your credit cards when you enroll in the program, many credit card issuers don’t report this activity to the three major credit bureaus if they know a consumer is enrolled in a debt management program.
Most debt management programs are between three and five years long. It could be worth pursuing if you are interested in improving your personal finance habits and you prefer a streamlined solution for paying off your debt. With debt management, your debt is consolidated and paid off in one monthly payment. This sense of structure and simplicity appeals to many people.
This strategy might not be worth considering if you’re working on a quick time frame or if your debt is too large to be realistically paid off in 3-5 years — even with negotiated interest rates and balances. (In that situation, you will likely need to consider either debt settlement or bankruptcy.)
Keep in mind that when you start a debt management program, it will likely be noted on your credit report, which could be problematic if you need to apply for new credit in the near future. However, the debt management plan notation will be removed from your credit report once you complete the program, according to Experian.
A word to the wise: When searching for a nonprofit credit counselor, it’s important to do your due diligence. Debt relief companies (also called debt settlement companies) often misleadingly present themselves as debt management agencies. Debt settlement companies are for-profit companies that attempt to negotiate your debt down on your behalf, and they’re part of an industry that’s full of potential scams and disingenuous behavior.
Alternatives to Debt Management Plans
If you don’t think debt management is right for you, here are some other paths you can consider:
- Aggressively pay down your debt. If you have fairly good financial habits in place, you can always consider paying off your debt on your own without the help of a credit counseling agency. Consider the debt snowball method, in which you pay off your debts from smallest to largest balance, or the debt avalanche method in which you pay off debts starting with the highest interest rate first.
- Debt consolidation. This form of debt payoff involves combining all of your debt and paying it off using a debt consolidation loan, which is a type of personal loan. Credit card consolidation only makes sense if the interest rate on your debt consolidation loan is lower than the interest rate on your debt.
- Student loan deferment. If you’re struggling to make ends meet, you might want to consider student loan deferment. If deferment is possible, then you can aggressively pay off your other forms of debt first, such as credit card debt or medical debt. Once your deferment period ends, you’ll be primed to focus on paying off your student loan debt.
Be Aware of Early Signs of Trouble
A missed payment here, a large credit charge there — although it might seem like your finances are in control save for a few missteps, things could be worse than you realize. You might have a few small but ingrained habits that are more damaging to your finances than you realize.
Here are some early signs of financial trouble to be aware of:
- You’re only making minimum payments. If you find yourself only making the minimum payment on your credit card each month, you might want to take a closer look at your spending habits. Cut back on your spending and put more money toward your outstanding balance so you can avoid spiraling interest charges.
- You don’t track your spending. A burrito bowl or a night out drinking every once in a while might not seem like a splurge, but if you don’t track your spending, how can you know for sure? You could be living beyond your means without even realizing it. It’s important to be aware of your needs, wants and savings goals. Create a simple budget plan if you don’t already have one.
- Your job is insecure. Job insecurity can happen for myriad reasons, from a fluctuating salary due to self-employment to a job that’s commission-based. If you’re prone to job insecurity, consider tamping down your spending to boost your emergency savings fund.
Contact Creditors Before Things Get Bad
Once you realize you’re in over your head, it’s important to be proactive. Don’t ignore the phone calls or letters you receive from your creditors or debt collectors. Instead, communicate with them openly. Many creditors will not only offer flexible repayment plans, but they might be willing to negotiate your debt down to a lower amount.
Although it can be tempting to avoid and ignore debt (especially unsecured debt, like credit cards), being proactive and communicating with creditors will work out in your favor.
Develop New Habits
Although you can’t prevent unexpected events like job loss or a medical emergency, there are ways you can be as proactive as possible when it comes to managing your money. After all, the one thing that will ensure your success in getting out of crushing debt is you — not a debt management agency or credit counselor.
The two most important elements of developing new financial habits are awareness and education. Educate yourself on how credit works, know your spending triggers (and address them!), automate your payments to maintain a positive credit history, and find tools that help you stick to your plan, like a money management app or free budget template.
Accountability is also a great tool. Find a relative or friend who helps keep you accountable, and you’ll be less likely to stray off course.
When In Doubt
Debt management exists for a reason. Many of us need a little help managing our finances and learning about how to budget and save. If you feel like you need the help of a professional when it comes to paying off debt, a nonprofit credit counseling agency that offers a debt management plan is a great place to start.
Search the National Foundation for Credit Counseling (NFCC)’s database to find a nonprofit credit counselor in your area. Before you know it, you’ll be on your way to becoming debt-free and ready to focus on saving for your future.