Include all debts in a management plan

Opening Credits columnist Eric Sandberg
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

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Question Dear Opening Credits,
I have a question about debt management plans. Can I put just two credit cards in such a plan or do I have to put my whole debt portfolio with them? I ask because I need help with the two major ones with a $20,000 balance. I am fine paying the others.  -- Marcus 

Answer Dear Marcus,
What you're describing is called "picking and choosing" in the credit counseling business, and it's highly discouraged. In a debt management plan (DMP), many of the creditors owed money agree to reduce interest rates and fees for the debtor in the program.

So why can't you include some of your accounts in the debt management plan but exclude those that don't lower their rates or that you can handle on your own? For a couple of reasons. One is the contract with the creditors, which stipulates that anyone going on a plan must include all credit card accounts with balances of over $100 -- except for one that may be used for emergencies. It's a matter of fairness. Why should one lender give rate concessions and ban charging (thus losing revenue) while their competitors continue to enjoy you as a customer? 

The other reason is that bundling all accounts with balances is best for the debtor. If your intention is to get out of debt completely and quickly, it's often wise to cut yourself off from the possibility of getting into even more debt. Closing accounts and paying as much as you can until all balances are at zero can be a great way to achieve that goal. Plans are set up so you make one payment per month to the agency, which distributes the money to your creditors with the goal of you being back in the black within five years. (You can expedite that time frame with higher payments.)

If you really want to keep access to multiple cards, the debt management plan isn't for you. However, you may be able to simulate a similar plan. Here's how:

  1. Determine a fixed amount you can send. No willy-nilly "what can I pay this month?" kind of thing. Your payments need to be steady, never dropping below a set figure. To determine that, review your budget. Pare spending down, add a bit for savings, and then whatever remains goes to your obligations.
  2. Ask your creditors for an interest rate reduction. Some credit card companies are willing to give their cardholders breaks on an individual basis. Call each and find out who will cut you a deal.
  3. Prioritize payments by interest rate. Rank your creditors by what they're charging you. The card with the highest interest rate should receive the most of your payment, while the others get the minimum. When the first balance is deleted, keep the payment the same and give the next most expensive creditor the bulk of it.
  4. Calculate your payoff time. Use a debt payoff calculator to get a general idea of how long it will take to get out of debt by mimicking a debt management plan. Because a credit counselor will put you on the five-year plan, input 60 months into the desired payoff time. It will show the amount you'll need to send, but if you can pay more, adjust the number of months accordingly. 
  5. Suspend credit use while you're repaying. You don't have to close every card (as you would with a plan), but do stop charging until you're comfortable living with these restrictions. After that, you can begin to add positive activity to your credit report, with a tiny charge every month or two, while continuing to drive down the balance.

There is nothing wrong with handling your own accounts if you're committed to the process. There are some clear advantages to doing so, too. You won't have to open new cards at the end, and your credit reports won't show that you needed help from an agency.

So the choice is yours: A DIY plan that you have to actively manage, or a DMP where they do the hard work -- but you also have to adhere to their rules.

See related: How debt management plans impact credit scores

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Updated: 11-22-2017