Dubai: If you’re in debt and struggling to get out of it, you’ve probably spent a lot of time trying to find a solution.
Maybe you transferred your balance to a balance transfer card to get zero interest and ended up racking up even more debt. Perhaps you have resorted to selling your assets to raise additional funds. Perhaps you have found a part-time job or overtime at work to meet your monthly payments.
Whatever you have tried, it may not be enough. This is when debt management helps, which is an arrangement to consider if you need outside help managing your bills.
What is a Debt Management Plan?
With a debt management plan, you are working with a credit counseling agency that creates a realistic plan that can help you get out of debt.
Typically, you deposit money each month with this agency, which in turn uses it to pay off your unsecured debts on your behalf according to a payment schedule that you agree to.
When you sign up for a debt management plan, your creditors may also agree to waive certain fees or reduce your interest rate. Obviously, these concessions could help you get out of debt even faster.
Still, there are details you need to know and understand before signing up for a debt management plan. These plans can save your life if you have a hard time, but they aren’t for everyone. Here are some pros and cons you should be aware of.
Know that debt management is not a loan
While debt consolidation requires you to take out a new loan to consolidate your existing debt, debt management does not require a loan at all.
Debt management is a process of paying off debt through concessions to creditors such as interest rate cuts and remission of late fees.
You don’t take out a new loan, but instead create a long-term plan to pay off the loans you already have.
Any debt management plan can take up to five years.
Since debt management requires you to work with a credit counselor to create a realistic repayment plan, it may take some time for you to work your way through any of these plans.
Financial planners say debt management can take anywhere from two to five years, with longer timeframes usually reserved for those most in debt.
It may seem like a long time, but remember that debt management is all about helping you pay off all the money you owe. If you owe too much (how much varies with your income) on credit cards and other loans, you can’t expect your problems to go away overnight.
Debt Management Can Save You Money Every Month
You might be wondering how debt management can help you break free from debt when you’re barely paying your bills.
Credit counselors say it’s important to remember that you’ll usually only make one monthly payment with a debt management plan, and that payment should be less than the total of all your debt payments now. .
The lower payment is often the result of waived fees and negotiated interest rates, the advisers add. Most of the time, your debt management plan will require you to transfer excess funds resulting from lower monthly payments into a savings account.
Factoring the costs of hiring debt management services
While debt management is a solution that works for many consumers with debt, the credit counseling agencies that offer these plans do charge for their services.
Research shows that some debt management companies charge fees for their plans, and those fees vary. On average, they make up about 17 percent of the monthly payment.
However, these costs are usually offset and more than offset by savings gleaned from reduced interest rates.
Debt Management Should Increase Your Credit Score
A common alternative to debt management plans is what is called debt settlement. With debt settlement, you are working with a company that offers to reduce your debt so that you pay less than you owe.
One of the main drawbacks to debt settlement is the fact that debt settlement plans usually ask you to stop paying your bills, which can lead to a drop in your credit rating.
In contrast, with debt management, your credit score should increase as the process progresses. This is because over time your credit usage (explained below) will decrease as you pay off your debts.
What is “use of credit”?
Credit usage refers to the amount of credit you used versus the amount of credit you received from a lender. It also refers to a ratio that lenders use to determine your creditworthiness and is a factor used to determine your credit score.
Not only that, but on-time payments made by your credit counseling agency (like making your own on-time payments) will also have a positive impact on your score.
Since your usage is the second determining factor in your credit score, and your payment history is the most important factor, debt management can help you increase your default score.
Debt Management Isn’t For Everyone
While debt management plans can be useful for consumers who complete them, they are not the ideal option for everyone, reiterate several credit counselors.
They also note that debt management is suitable for people who face less severe financial hardship than a typical debt settlement client.
Generally speaking, this means consumers whose credit card debts are Dh30,000 or less, based on the average income earned in the region, although there are still many exceptions.
For consumers with much more debt than that, you may need more than a reduced interest rate and some help with debt management to move forward. Some may even consider bankruptcy.
Debt Management Plans have been proven to help you learn how to use credit to your advantage. Creating a business plan on how to effectively and efficiently repay debt is the best scenario for leveraging debt in your favor, creating credit, and instituting financial discipline, the planners noted.
Once you’ve established a system and the debt is paid off, you also learn the lesson that having less debt means having more money to save and invest. For this and other reasons, debt management is actually a great tool when properly structured and executed.
Ideally, you’ll take the lessons you’ve learned about paying down debt in a debt management plan and use them to avoid getting into debt in the future.
Can’t I Create Debt Management Plans Myself?
Finally, it is important to note that many of the tasks performed by debt management plans can be performed by you.
For example, you may be able to get your creditors to lower their interest rates and waive fees if you call and explain your situation.
Whether you are using a debt management plan or not, you can also sit back and review your spending and create a budget that could allow you to spend less and put more money into your debt each month.
If you are considering a do-it-yourself approach, planners suggest starting with a comprehensive list of each creditor with updated balances and interest rates.
You should also know what your required monthly payments are. From there, you need to track your monthly spending to see if you have any cash available each month that can be redirected to debt elimination.
Finally, you can create a debt repayment plan that will pay off all of your bills over time. Many consumers love the debt snowball method where you focus on paying off your smaller debts first and making minimum payments on the rest.
A debt management plan can do all the tasks with you and may be the best option if you are feeling overwhelmed and need help getting started.