Can Debt Management Improve Your Financial Health?

Debt management (not to be confused with debt settlement) involves restructuring your debts to lower your payments and interest rates. The idea is to help you pay off your consumer debt faster. Debt management typically involves some counselling to help you learn about budgeting, making your payments on time, and managing your bills. Debt management may also involve consolidating your debts with a home equity loan or a personal loan. Lower payments on your consumer debt can make it easier to afford a home loan and may help you save up a down payment.

Debt Management Has Side Effects

However, debt management may also have some consequences you are unprepared for. If your credit report shows that you are in a credit counseling or debt management plan, for example, FHA lenders treat you the same way they would if you had filed for a Chapter 13 bankruptcy. You may be able to get a mortgage, but you’ll have to have been paying on your plan for at least twelve months. The effect on your credit score usually depends on who your creditors are and their policy for reporting your payments.

Citibank, for example, merely adds a note to your payment history that you are enrolled in a credit counseling program. And that notation has no influence on your FICO score. But First USA reports its cardholders as delinquent until they have made three consecutive on-time payments through their debt management plans. Those three late payments can torpedo a score by a hundred points!

So Should You Try Debt Management?

Despite the claims of some TV advertisers, enrolling in credit counseling or debt management is not for those who just want more favorable terms from their creditors. If you can make your payments, but just want a lower interest rate, don’t put your credit score at risk; just call your creditors yourself and ask for a lower interest rate. If they don’t budge, you can always move your account.

Conversely, if no plan could get you out of debt in five years or less, bankruptcy may be a better option. Most credit counseling or debt management plans are designed to retire your debts in two to four years if you stick to them. If your debt will stretch out for years and years, it’s probably time to talk to a lawyer. A bankruptcy trustee could put you in a Chapter 13 program that could get you debt free in three to five years.

Debt management is a viable alternative if you can’t make anything more than your minimum payments or your debt payments exceed your income. But skip the “as-seen-on-TV” outfits. Look for an accredited consumer credit counseling service that provides genuine help.