Debt Management

If you’ve accumulated a large amount of debt with several different creditors and your financial situation is such that you can no longer afford to make on-time payments, consulting a debt management company could prove beneficial. Companies that offer debt management services act as middlemen between you and your creditors. Instead of paying off 15 different creditors every month, you give the management company a single monthly payment, and it, in turn, pays off your creditors on your behalf.

Aside from saving you the hassle of answering debt collection calls and dealing with several different lenders at once, enlisting the services of a debt management company usually makes it much easier to negotiate lower interest rates with your creditor. Additionally, part of a company’s debt management services includes helping you plan a personal finance budget so you can start to repair your credit score and avoid getting bogged down by debt in the future.

How does debt management affect credit?

One of the biggest concerns on the minds of people who are thinking about entering a debt management program is that working with a debt management company will negatively affect their credit score. This fear is not entirely unfounded. However, if you find yourself mired in debt and cannot make on-time payments on your bills, the positive effects that debt management can have on your credit outweigh the negative ones.

When you are in a debt management program, your credit report will show that you are making payments through a debt management service. Creditors and lenders who see this on your report might be more inclined to view you as high risk when setting interests on your loans or issuing future credit. However, your FICO score is not affected by your use of debt management services.

Foregoing debt management, on the other hand, may lead to a continuing pattern of late payments and, eventually, bankruptcy, which will have far worse effects on your credit than seeking out the services of a debt management agency ever will.

The benefits

The benefits of a debt management program can be many. A skilled debt manager will guarantee lower interest rates and monthly payments, and might even be able to negotiate with creditors to waive any past late or over-the-limit fees. But perhaps the biggest benefit comes from the fact that you will no longer have to deal directly with creditors. The hassle of answering multiple phone calls each day and having to worry about sending in several different payments every month is gone.

This leaves you with less stress and more time to focus on saving up money and working on a personal finance budget. A good debt manager will also provide you with strategies to eliminate credit card debt, give you general debt advice, bankruptcy credit counseling, and instructions on how to start rebuilding your credit.

Fees

For their services most debt management companies charge a fairly sizeable commission (about 10% or more) on your monthly payment. Additionally, a debt manager might also get a rebate from your creditors on the amount of each, on-time monthly payment made on your behalf. This set up makes it easy for management services to engage in unethical business practices, charging you more than they should or overall making your financial situation worse than it was before.

Debt management services are not for everyone. If you cannot afford it, do not let yourself get carried into a deal that you’ll later regret. Check a debt management company’s profile thoroughly before enlisting their services. Make sure they are accredited, and shop around before making your final decision.

How does it work?

The first job of a debt management service is to assess your current financial situation, taking into account interest rates on your loans, the total debt you’ve accrued and the required minimum payments you have to make. The debt manager then negotiates with your creditors on your behalf to re-structure the terms of your loans. This should result in lower rates and lower monthly payments.

The management company then arranges a modified payment plan with your creditors, based on how much you can afford to pay per month given your current financial means. For the next few years, you make a single monthly payment to your debt manager, who then distributes it among your creditors, until your entire loan is paid off.

Things to do

There are a few things you should do in order to ensure a beneficial debt management experience. First, assess your current financial means thoroughly and honestly. If you don’t think you can afford to pay for debt management services, don’t do it. There are alternatives out there, such as non-profit organizations and government sponsored programs that provide free debt advice.

If you do decide to go through with a debt management plan, get everything in writing and make sure to read the fine print. Ask for exact figures and an estimate of the plan’s duration. And do your research so that you enlist the services of an accredited management company.

Once the plan starts, keep up with your payments. If you continue to default on payments and do nothing to improve your personal spending habits, you will only be wasting even more money by hiring a debt management agency.