Debt Management Plans: Pros and Cons

Taking on too much debt is a common struggle. The convenience of credit cards, store cards, payday loans, and other types of credit makes the concept of buying now and paying later hard for many to resist.

If you feel like you have taken on more debt than you can handle, there is a way to turn things around. A debt management plan is a great strategy to help you tackle your debts and get your financial situation under control.

What Is a Debt Management Plan?

A debt management plan involves you working closely with a nonprofit credit counseling agency to decrease or eliminate your debts, like San Francisco Federal Credit Union’s partner, Balance. Balance has helped hundreds of thousands of people over the years pay off their debts and save money.

Although there are many nonprofit credit counseling agencies that will work with you on paying off your debts to turn your financial situation around, Balance is committed to maintaining the highest standards so you can be assured that you are receiving quality service. The organization is accredited and submits to voluntary audits. Also, all of its counselors are certified and follow core policies that were created to help you reach your goals in the shortest amount of time possible. 

If you work with an agency, you will have to agree to not acquire any new debts while you are working with them. A debt management plan may be a good option if you:

  • Struggle to make your monthly payments
  • Want to lower your interest and fees
  • Are ready to break free from repeat cycles of debt

When you participate in a debt management plan, your counselor will help you create a budget. A budget isn’t something that’s meant to constrain you. It involves allocating portions of your monthly income to your expenses to help you save money.

Your counselor will also reach out to your creditors to see if they will work with you on your debts and negotiate to see if they will consider lowering your interest rates or waiving late fees. The less you have to pay, the quicker you can decrease or eliminate your debts.

An important aspect of a debt management plan is how you pay your debts while you are participating. Instead of paying your creditors directly, you will make one payment each month to the credit counseling agency. The agency will then pay your monthly bills for you.

Just as it often takes several years to accumulate debt, it may also take several years to turn your financial situation around with a debt management plan. As long as the plan is closely followed, most people achieve their goals in 3 to 5 years.

What Are the Pros of Debt Management Plans?

There are several important pros of debt management plans to consider. These programs can give you a much-needed way to reduce or eliminate your debts and provide a plan to manage your money better.

You Will Receive Financial Counseling

Debt management plans aren’t just about paying down your current debts. You will also receive financial counseling about how to manage your money better. This will help you to live with a budget so you can avoid debt as much as possible.

You Only Make One Monthly Payment

Keeping up with multiple payments each month can be a hassle. If you accidentally miss a payment, it could result in an expensive late payment fee. You only have to make one payment to your debt counseling agency each month for your debts. The agency will take care of paying your creditors for you.

You May Be Able to Save Money

The counseling agency you partner with will work to lower your payments and interest rates. This could help you save money and pay off your debts faster.

It May Help Your Credit Score

Carrying a high amount of debt can negatively affect your credit score. Reducing your debt may improve your credit score over time.

Pay Off Debts

This is the most obvious pro! If you stick with a debt management plan, you will reduce or eliminate all of your unsecured debts.

What Are the Cons of Debt Management Plans?

Although a debt management plan is a great way to get control of your finances, there are some important negatives to consider. Everyone’s financial situation is unique, and being able to eliminate debts may be more important than these inconveniences.

Not All Debts Are Covered

Debt management plans mainly assist people with eliminating unsecured debts, such as credit cards and personal loans. Mortgages, car loans, and other debts are usually not covered.

You Have to Stop Using Your Credit Cards

While you are working on paying down your current debts, you won’t be permitted to use your credit cards. You may even be required to close your credit card accounts. This could be a problem if you have to book a hotel room, make a flight reservation, or rent a car, all of which require a credit card.

No New Loans

You will not be permitted to take out any new loans while you are working on repaying your debts. This includes a loan for a new car, a student loan, or anything else.

Creditors May Say No

Although your counselor will work on your behalf to negotiate interest rates and monthly payments, your creditors may not go along with it. They may demand the full payment that is due each month.

Consistent Payments Are Required

Just because you have a counselor working on your behalf, it doesn’t mean that you can coast through the program. You still have to do your part, which means making consistent monthly payments. If you don’t uphold your end of the agreement, there is a chance that the credit counseling agency may stop working with you.

Debt Management Plan Pros and Cons: What’s Right for You

Debt management plans, like those offered by San Francisco Federal Credit Union’s partner, Balance, make sense for those who are ready to take control of their finances and are willing to work with someone to help them achieve their goals. But they may not be a good fit for everyone. It’s important to carefully weigh the debt management plan’s pros and cons before making a decision.

If you aren’t sure if a debt management plan makes sense for your situation, contact one of Balance’s counselors to see how they can help you turn your financial situation around. A counselor will be able to review your finances and either recommend a debt management plan or another course of action, such as a debt consolidation loan.

Be sure to check out the following article to learn about the benefits of debt consolidation. This can help you decide which option is best for your situation.

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