When is a debt management plan a sound move?
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I want to know if entering into a debt management plan is a
wise choice for me. I am a single parent who never received support. My credit
cards total $22,474. The rates on the cards are 9.9 percent and 0 percent. I've
never paid late. I am currently leasing a car because of high ratio owed. My
salary is $63,000, but I also have student loans for a master's degree starting
in November 2012. -- Betty
Maybe. Debt management plans can be beneficial
arrangements for people who need help paying down their balances. As you may
already be aware, these plans are offered by credit counseling agencies. To
know if it's a good decision or even an option, you have to first go through an
hour-long appointment with the credit counselor. Being an alumni of one such
agency, however, I can walk you through the process.
The session consists of a thorough review of your income,
expenses, assets and liabilities, as well as your goals. The counselor will
analyze it all and then present an action plan that consists of a series of
suggestions based on your desires and circumstances.
If you have enough money to pay your bills by selling
unnecessary assets or by prioritizing your budget, the counselor will explain how you can
do so. On the other hand, if you can't make it on your own, but have just
enough money left over after paying your basic expenses to meet all of your
creditors' minimum payments, a debt management plan will be suggested.
Many credit card companies reduce interest rates for those
on a debt management plan, and because of that more of your payment goes toward the principal.
Plans are arranged for total debt elimination between three and five years,
which gives you the assurance that you'll be in the clear after that time. This
can be a great relief to those who feel they'll never pay the debts down
because the finance charges are so high.
So would it be right for you? That's hard to say without
knowing what you need to spend on essentials. I do know that your interest
rates are already excellent (you can't get better than zero, right?), so you're
unlikely to get a better deal with a debt management plan. Still, if the boundaries set by the
agency are attractive -- you must close the cards on the plan and promise not get into any more debt while you're working with the agency -- it may be
There are downsides, of course. While the plan itself has no negative effect on a FICO score, lenders who view the report itself and see
that that you're participating on a third-party payment plan may assess the
Given all that, if you can pay the debt independently, you
ought to do so.
To mimic a debt management plan, figure out how much you'll need to pay the
debt down in the same time frame as what an agency would arrange. For example,
for a three-year plan, you'd need to send about $675 each month. I averaged
your interest rate to 5 percent for the total debt, so you can be more precise
by plugging your actual numbers into a debt payoff calculator. Can't manage that sum? Go
for the longer repayment time frame of five years, which will only cost you
$425 per month. Whatever you decide, stick with it and don't charge another
penny while in debt payment mode.
In the meantime, you have a student loan looming. Start to
pare your spending down now so you can adjust for its payment. If you have any
property or assets to sell, do so and apply the proceeds to the consumer debt.
The sooner that's out of the way, the more you can concentrate on repaying what
you borrow for your education.
You don't specify why you aren't receiving child support,
but you may want to pursue what's owed to you. The effort and time in doing
that may be extreme, but if it's safe and possible, consider it.
See related: The pros and cons of debt management plans, 6 tips for finding the right debt management plan for you
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: September 12, 2012