Warning: Late repayment can cause you serious money problems. For help, go to moneyhelper.org.uk.

Top 10 Secrets for Debt Management

What is Debt Management?

Debt management aims at helping people to manage debts. A debt management plan is agreed between the person in debt and a creditor or debt management company. It helps you pay off your debt at a more affordable rate by making reduced monthly payments.

A Debt Management Plan (DMP) helps you manage multiple debts such as credit card and other loan repayments with one monthly payment. It is designed to help you pay your debts off in affordable installments.

How a Debt Management Plan works

An outside company or organization will set up and manage your Debt Management Plan (DMP). Before preparing your plan, the DMP provider will give you debt advice and help you in putting together a budget. They will show you the amount you can afford to pay off your debts, after covering your living expenses and priority payments. They will negotiate with your creditors to set up a new repayment plan for you.

Normally, the amount that remains after covering your essential costs will be shared fairly among your creditors. You will make a monthly payment to the Debt Management Plan provider, then they will pass the right amounts to your creditors.

Is Debt Management Plan Right For You?

A DMP will be right for you if:

  • You want a third party debt management company to deal with your creditors.
  • You can afford your living expenses and paying off your priority debts such as rent. But, you are finding it difficult to keep up with your loan payments
  • Making a single monthly payment will help you with managing debts.

Advantages and Disadvantages of Debt Management Programs

The benefits of DMP is that:

  • most creditors will cut late fee charges and reduce interest rates,
  • you will get to pay only what you can afford,
  • and, you will get fewer collection calls.

But, the drawbacks of this program are that:

  • you will not be able to take on any new credit,
  • you will need to make monthly payments to keep the benefits of the program,
  • and, you might damage your credit score.

What You Need To Know About Debt Management

1. Debt Management Is Not A Loan

Unlike debt consolidation, where you combine your debts by taking out a new loan, in debt management, you don't need to take out any loan. Debt management is the process of repaying your debt using creditor concession. A DMP will allow you to create a long-term plan of repaying your existing loans and credit card debts.

2. There are Paid and Free Plans Available

Most third party commercial agencies will offer similar debt management plans. Debt managers will cover their running costs by charging the customer a fee of about 2.5% of their total debt. But, if a person is experiencing extreme hardship, he/she can negotiate for a lower fee. Additionally, the agencies will allow the consumer to repay their debt within three to five years. And, the third party agencies allow debtors to exit the program whenever they choose to.

There are providers who don't charge anything to their customers. These are usually charitable organisations, supported by the credit companies and banks directly. An initial call/interview to assess your needs and advice with what help you need is common practice. Check out National Debtline, StepChange and Payplan for some free information and debt advice as a first step, before you commit to pay any debt management company for help managing debt.

3. Agencies Vary In Quality

You will find some non-profit organisations offering debt management plans. Remember, they too are in the business to make money. A debt management company usually has a different way of distributing its earnings. Sometimes, they will charge a modest monthly fee. Paid DMP providers often argue they serve customer interest better. This is because they are paid by the debtor and not the credit providers.

All agencies have to go through a rigorous process for them to get certified. Before doing business with any of them, ensure that they are reputable. Check that they have good customer relations, and send payments to the creditors on time.

4. Not Everyone Can Benefit From Debt Management

You should first determine if the debt management plan is right for you before going all in. You should first check the type of debts you have, to find out if the plan will help you in solving your problem. If your debt consists of unsecured debts such as; personal loans, credit cards, or medical bills, debt management may be an ideal solution for you. If you have unpaid taxes, child support, or other complex debts, debt management may not work for you.

5. You Will Need to Give Up New Credit

After joining a DMP, you will be limited from opening new credit cards. By opening one, you will be risking the benefits that have been negotiated for you by your debt management program. Not opening a new credit line may actually be for your best interest. Ensure that you do not apply for other forms of financing such as auto loans during the repayment period.

6. Enrolling in a DMP May Lower Your Credit Score

You might have read about how DMP hurts your credit rating, but that is not entirely true. If you are currently behind your credit payment or are having several late payments, debt management can help you in improving your credit score.

If you have several debts and you have been making timely repayments on each one of them, enrolling in debt management can lower your credit score. This is because your debt management company will renegotiate your credit obligations. The agency may change the dates when you make payments to your creditors, which may cause late payments to be reported to your credit history. The creditors will close your accounts, so even if you had a good history with those accounts, they may not be included in your credit history.

Although your credit score may be affected in the short term, joining a DMP will be a long term program. Repaying all your debts is the best thing you can do to your credit score.

7. Enrolling In A Debt Management Program Will Lower Your Interest Rates

After the third party agency contacts your creditors, most of those creditors will lower your rates by 12%-16%. This will be very beneficial, especially if you currently pay an interest of 17% or more. It will also help you if you have defaulted on any of your loans. The reduced APRs will help you to save thousands of pounds.

8. Joining A DMP Will Affect How Lenders See You

Even if you will be paying your bills each month when on a DMP, in most cases, you will be paying a lesser amount than what is required. Prospective lenders will know that a third party is helping you to make your payments. This will show you are struggling with your debt. Lenders will require you to finish your debt management program and pay off all your debt before issuing you a new loan.

9. It Is Efficient, Simple And Steady

Your payment will remain constant after enrolling in a debt management plan. You will not have to worry about the amount that you will be paying each month. It will stay constant until your creditors are satisfied.

When you complete paying one debt, the other creditors will get a larger share of your payment. This speeds up your repayment process.

10. You Can Do It By Yourself

There is nothing that prevents you from negotiating with your creditors. You can pick up your phone, contact your creditors and try to negotiate your settlement. Additionally, you can take a look at your spending habits. Therefore you can create a budget that will minimise your spending to help you free up some cash for repaying your debt.

Final Thoughts...

Before signing up for any program, make sure you do your research and find all the facts. Make sure the debt management company is registered with the financial conduct authority. Get professional, free debt advice to see how much you can afford to pay month by month in a debt management plan before signing up for one.

But be careful! Although a debt management plan may be a lifesaver, to others, the program may do more damage than good. Try to cut back on your expenses and save some cash to current manage debt. You may be able to pay back your creditors without any extra help if you stick to a strict budget.