Choosing and Using a Debt Management Program

A debt management service acts as a liaison between you and your creditors. They negotiate a single for you, collect a single monthly payment, and distribute it to your creditors. The service charges a commission, usually a percentage of your monthly payment, and may also get rebates from your creditors.

How Debt Management Affects Your Credit

If your debt management service negotiates reduced interest rates or balance reductions on your behalf, it may show up on your credit record because you won’t be paying as agreed. However, the effect on your credit is much less damaging than late and missed payments.

If you made a timely monthly payment to your debt management service, but it doesn’t make your payments to your creditors on time, find out why. If the service neglects to pay your debts on time, your credit will suffer. Also, if the service charges you more than expected and applies your monthly payment to fees instead of paying your creditors, discontinue the service and contact your creditors directly.

Debt Consolidation Is an Alternative

It is not unusual for a debt management service to charge a commission of 10 percent on your monthly payment. The firm may also obtain a rebate from your lenders on the amount of each monthly payment they make on your behalf, which actually creates a conflict of interest since they are supposed to be working for you but are getting paid by your creditors.

There are unethical debt management services that encourage people to sign up for services which are not in their best interest, and non-profit status is no guarantee that a service is ethical. Look for services accredited by the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.

Instead of debt management plans, you may want to consider a debt consolidation loan. This gets you a single monthly payment, but there are no service charges and your debts are discharged immediately. Then all you have to do is make the monthly payment to the debt consolidation lender. Another alternative is to try to negotiate lower interest rates and payments with your creditors on your own.