Many people are nervous about setting up a Debt Management Plan (DMP) because they’re worried about the potential negative effects. So let’s set the record straight today and talk about the pros and cons of a DMP with a little Q&A.
1. How will the DMP help me?
All of your debts on a DMP will be consolidated into 1 payment with 1 due date each month. All debts on the DMP will be paid off in 5 years or less. Typically interest rates* are reduced and sometimes even your overall monthly payment* is reduced. If you are behind on payments, beginning a DMP and making on-time payments can sometimes bring your account current and stop late fees*. (*Depends on your creditors’ requirements.)
2. Will I save money by going on a DMP?
In general, yes. If you’re making only the minimum payment, it will take you YEARS longer to pay off your debt on your own versus on a DMP. As mentioned in #1 above, all debt on a DMP must be paid off in 5 years or less. You’ll also pay less overall when interest rates are reduced.
3. Will the DMP hurt my credit?
The simplest answer is maybe, but only at first. Each creditor has its own policy on reporting to credit bureaus. You may see a line item under your creditors showing that you’re on a DMP. Now there may be an initial and slight decrease in your credit score because of multiple accounts closing at the same time (if you have more than one credit card). However, as you continue to make on-time payments on a DMP, your credit will improve because of on-time payments and decreased debt balances. Also, if you’re trying to pay off debt and a DMP will get you there faster, in five years you won’t remember that your score went down a little bit when you’re celebrating being credit card debt-free. Click HERE for more info about credit scores.
4. Can I get a loan if I’m on the DMP?
Some lenders won’t give loans to borrowers on a DMP. If you’re looking to get a major secured loan, such as for a car or home, you likely should either do that before going on a DMP or wait until you’re done with the DMP. You could certainly ask your potential car/mortgage company ahead of time about their policy.
5. What happens if I take out new credit while on a DMP?
First, please don’t if you can avoid it. If you’re somehow able to do so, some creditors have a policy where you would no longer be able to be on the DMP (and would lose creditors’ concessions, e.g. lower interest rate). However, if you do find yourself with more debt that isn’t on the DMP, call or email us to see if it can be added.
6. Once I start my DMP will my creditors stop contacting me?
No. You will continue to receive statements from your creditors while on the DMP and we will ask you for copies of those statements from time to time to verify debt balances. We encourage everyone to continue opening/viewing monthly statements and watch for anything out of the ordinary.
7. What if I can’t make my payment?
Don’t wait – call or email us (or your applicable DMP agency) as soon as possible. We’ll walk you through your options and next steps.
8. How can I make my DMP most successful?
If your main goal is to become debt-free, then a DMP is a wonderful opportunity to take advantage of. While there may be minor credit issues from starting DMP, the benefits immensely outweigh any negative side effects.
If you want to conquer your debt with a Debt Management Plan, call us today for an appointment at 888.577.2227 or click here to get started online. Your debt-free future awaits!
Author Elaina Johannessen is a Program Director in our LSS Financial Counseling Client Services Department.