 TITLE: How to Know if a Debt Management Plan Makes Sense CONTENT: How Does a Debt Management Plan Affect Your Credit?\n---------------------------------------------------\nEnrolling in a debt management plan will not hurt your credit score on its own. Your credit report will note that you are participating in a DMP, but such notes are not calculated into credit scores.\nKeep in mind, though, that anyone who pulls your credit report will see it and is free to make a judgment about it.\nActions taken as part of a DMP can hurt your credit scores. Here's how:\n**Increased credit utilization**: As part of your DMP, you'll be required to close the credit card accounts you're paying off under the plan. When you close a credit card, the amount of credit available to you shrinks, which increases your credit utilization rate (the amount of available credit you're using). Credit utilization accounts for 30% of your FICO® Score☉ , so closing accounts can negatively impact your scores.\n**Diminished account variety**: Managing different types of credit accounts is usually good for a credit score, so closing them can shave points from your score.\n**Possible late payments**: The Federal Trade Commission recommends you keep paying your creditors until you receive written confirmation from them noting they have accepted your DMP. Then check with your credit counselor to make sure payments will be made by each account's due date every month, and follow up with creditors to confirm the agency is paying bills on time.\nOn the other hand, DMPs can elevate your credit scores over the long term. If you had a history of delinquencies, you'll be paying on time, which is positive. Your debt will steadily decline too. Eventually your scores should not just recover, but escalate.  \nHow Is Debt Management Different From Debt Settlement?\n------------------------------------------------------\nAlthough debt management and debt settlement may sound similar, they are very different. With DMPs, you are satisfying 100% of the amount you owe, while debt settlement allows you to pay less than the full balance. For that reason and more, debt settlement can hurt your credit significantly more than a DMP.\nOther ways debt settlement differs from a debt management plan:\n*   **Debt settlement firms require you to stop making debt payments.** The thought is that if you stop making payments, your account will eventually become delinquent. At that point, usually when your account is referred to collections, the creditor will be willing to settle for less than the full amount owed. While you wait out the process, late payments are regularly reported to the credit bureaus, damaging your credit. With a DMP, the goal is to keep your credit in good standing and negotiate terms that will allow you to pay the debt in full.\n*   **Debt settlement companies have a profit motive.** Debt settlement companies are for-profit businesses that usually charge a percentage of the settled debt. For example, if you owe $5,000 and your debt was settled for $3,000, the company may charge you 25% of the $2,000 they saved you—costing you $500. And though you'd be wise not to avoid credit payments as a strategy to reduce debt, these companies can't do anything you can't do for free on your own.\n*   **You may have to pay taxes on the settled sum.** Forgiven debt of $600 or more is considered taxable income by the IRS. The settlement discount, then, may not be as attractive as it initially seemed.\nIs a Debt Management Plan Right for You?\n----------------------------------------\nA debt management program may make sense if:\n*   Most of your debts are unsecured credit card balances.\n*   The interest rate reductions are especially favorable.\n*   You have a secure income.\n*   The payment is feasible for years and doesn't jeopardize your essential expenses.\n*   You're ready to make necessary budgetary changes to pay off your debt.\n*   You can live a cash-based lifestyle for a number of years.\nAlternatives to Debt Management\n-------------------------------\nEven if a DMP is starting to sound like a good decision, weigh it against other potential options:\n**DIY**: Call the credit card companies, explain that you want to concentrate on paying off your debts, and ask if they will reduce the interest rate for you. Some may. Then pay your creditors with the same system: Determine a fixed amount you can send every month, and stop charging. As one account is paid off, pay more to the others until you're debt-free.\n**Debt consolidation loan**: If your credit scores are decent, you may be able to use a consolidation loan. With it you bundle all or most of your debts into one loan that offers a lower interest rate. Even if the lender charges an origination fee of a few percentage points, you may still come out ahead. And if the term is longer than five years, the monthly payment may be far lower than what it would be with a DMP.\n**Balance transfer credit card**: Another way to self-manage debt is to get a low or 0% annual percentage rate (APR) balance transfer credit card. To qualify, your credit scores usually need to be 670 or higher, but the savings can be tremendous. If the APR on a credit card with a balance of $8,000 is 26%, and you delete it in 15 months at zero interest, the accumulated interest you'd save would be $1,456. Use a balance transfer credit card, pay it off within the same time frame, and the only extra charge you'd pay would be a transfer fee (typically 3% of the transferred amount) of $240.\n**Bankruptcy**: Although this should be a very last choice, there may be no other options for some severely indebted people. A Chapter 7 will wipe out all allowable unsecured debts so you can start fresh, but you have to qualify and can lose property. A Chapter 13 lets you pay a wide variety of debts through the court over three to five years. Interest is dischargeable and you get to keep your property, but your spending may have to be pared down. Both bankruptcy types have dramatically bad effects on your credit scores.  \nWeigh Your Options\n------------------\nSo is a DMP the best option for you after all? If your credit history is attractive (check your Experian credit report for free to find out), you need high credit scores now, and you can manage your accounts with a few expense or income adjustments, maybe not. Under the right circumstances it can be, though, and it's definitely worth exploring if you're feeling crushed by credit card debt. At the very least, a nonprofit credit counselor will provide professional financial guidance at no cost to you. END