September 27, 2022

Pros and Cons of Debt Management Programs

If you’re considering a debt management program, it’s important to understand all of the pros and cons and how it may affect your finances in the future.


One monthly payment rather than many: Having multiple monthly debt payments can be overwhelming, and a debt management program allows you to consolidate them into just one.

Reduced interest rate: Debt management programs are often able to negotiate lower interest rates on your debt, which allows more of your money to go toward the principal.

Waived or reduced fees: If you have outstanding fees on any of your debt accounts, your debt management program may be able to get them reduced or waived altogether.

Help and accountability paying off debt: For many borrowers, the accountability that comes with a debt management program is the most important step. A third party creates a plan that fits within your budget and helps you stick with it.


Fees required: Debt management programs often require an upfront fee, as well as ongoing monthly fees as long as you’re in the program.

Doesn’t cover every debt: While debt management programs can often cover credit cards and some other unsecured loans, they usually aren’t appropriate for secured debt and can’t cover all unsecured debt (such as student loans).

Less access to credit: While you’re going through debt management, the credit counseling organization may restrict your ability to get new credit and/or require that you close any existing credit cards.

Is a Debt Management Program Right For You?

A debt management program can be an effective tool to help you tackle your debt. These programs are well-suited to certain borrowers — they aren’t right for everyone.

The first thing to consider when deciding if a debt management program is right for you is what type of debt you have. These programs can’t be used for secured debt like mortgages or auto loans. They also can’t be used for certain unsecured debts, including student loans. They’re best suited to credit cards and personal loans.

Next, consider whether the restrictions around debt management work for you. While on this type of program, you often must close your existing credit cards and will be restricted from opening new credit accounts. For borrowers who will need access to credit in the next couple of years, this type of program probably isn’t suitable.

Finally, consider whether you can manage the debt yourself. For many borrowers, the debt snowball or debt avalanche are all the debt management they need.

If you decide that a debt management program is right for you, it’s also critical that you choose a reputable program. The Federal Trade Commission recommends narrowing down a list of credit counseling agencies and then checking out each company with your state’s attorney general, the Better Business Bureau, and local consumer protection agencies. You can see if any of the companies have had complaints filed against them.

Does a Debt Management Program Affect Your Credit Score?

One of the most important questions many borrowers may find themselves asking is whether a debt management program will affect their credit score. After all, other debt solutions such as debt settlement can seriously harm your credit, and it’s important to understand the consequences of any program you’re considering.

There are several ways in which a debt management program can affect your credit. First, this type of program may harm your credit if it requires you to close your credit accounts. Your credit utilization — or the percentage of available credit you’re using — will increase, causing your credit score to decrease.

Another way debt management can affect your credit is by raising or lowering your average age of credit. Closing an older account can harm your credit score since it lowers your average age of credit. On the other hand, closing a new credit account when you have older accounts still open can improve your score, since it increases your average age of credit. Keep in mind that because accounts stay on your credit report after you close them, this change isn’t likely to affect your credit score immediately, whether it’s a positive or negative change.

Next, a debt management program can improve your credit by bringing all of your credit accounts current. If you currently have accounts that are delinquent, they’re hurting your credit score. A debt management program may bring these accounts current, therefore reducing the impact of these negative marks.

Finally, a debt management program requires regular debt payments to the credit counseling organization, which then makes your debt payments on your behalf. Each of these on-time payments will appear on your credit report and help boost your credit score over time.

Remember that debt management only positively affects your credit if you stick to your plan. Just as in any other situation, if you fail to make your required payments, you’ll see those late payments appear on your credit report, and are likely to see your credit score fall.

The Key point:

Paying off debt is just one part of your overall financial plan. You can take a few actions now to get yourself on the right track.

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