Understanding Debt Management and If a Debt Management Program Is Right for You

Simply put, debt is money owned and an obligation to pay off funds to another person, company, or government entity. Nearly eight out of 10 Americans have some type of debt, and the average debt per adult is $66,772. The most common ways to accumulate debt are through credit cards, loans, and unexpected expenses. 

If you are struggling with debt, you are certainly not alone. Yet getting a handle on your debt is crucial for financial health and stability. Therefore, you might consider a debt management program as a tool to regain control over your finances.

From the financial experts at Tower Loan, here are answers to the common questions “What is debt?” and “What is debt management?”

What is Debt?

First, let’s answer the question, “What is debt?”

Debt is borrowed money that must be repaid, typically with interest. There are two main types of debt: secured debt and unsecured debt.

Secured debt is backed by collateral, such as mortgages and automobile loans. Unsecured debt is not backed by collateral; examples are credit cards and personal loans.

It’s important to realize that not all debt is inherently bad. Some types of debt can actually help you build wealth, such as when you take out a mortgage on a new home you buy. However, other types of debt, such as credit cards, come with high interest rates and do not necessarily set you on a path toward financial success.

What is Debt Management?

Now, precisely what is a debt management plan?

Debt management is a strategic way to budget and repay money to the people or companies you owe. Debt management programs help you pay down or manage your debt effectively, be a responsible borrower, and address your financial obligations rather than ignore them.

The goal of debt management is to lower overall debt and manage your payments. By doing so and with efficient strategizing, you may also be able to reduce your interest rates.

Debt management plans allow you a structured way to pay off your debt within about three to five years. The National Foundation for Credit Counseling offers a listing of nonprofit, accredited crediting counseling agencies to work with.  

How Debt Management Works

If you are trying to manage debt, there are three main approaches: DIY, credit counseling, and debt relief companies.

DIY Debt Management

You can take a DIY approach to debt management by creating your own personal plan using budgeting and repayment strategies. Common approaches include the snowball method, which involves paying off your smallest debts first and as quickly as possible. Another approach is the avalanche method, in which you pay off high-interest debts first to reduce the overall amount of interest you are paying.

When you DIY your debt management, you save money by not having to pay third-party fees while maintaining complete control of your debt management plan. However, this approach requires significant self-discipline, and you may have less negotiating power with creditors than if you were working through a reputable company.

Debt Management with Credit Counseling

Another way to handle debt management is to work with a credit counselor. Credit counselors understand the debt management process and are skilled in plan creation, debt assessment, creditor negotiations, and setting you up with monthly payments you can afford. They can also create a structured repayment plan for you and negotiate lower interest rates.

When you hire a credit counselor, you must typically pay enrollment and monthly fees. The fees vary by state but are often around $25 to $35. However, these fees are generally justifiable based on the potential savings they will create in the long run.

Debt Relief Companies

What is a debt management plan through a debt relief company? These companies specialize in negotiating settlements for less than what you owe, and they can manage payments for you in a dedicated account.

This approach is nice for having your debt management handled professionally, but it comes with some risks. Working through a debt relief company can impact your credit score, incur additional fees, and result in potential legal actions if settlements fail.  

Pros and Cons of Debt Management Plans

Now that you understand the answer to “What is debt management?” let’s examine the pros and cons of using a debt management plan to manage your debt.

Advantages

• Consolidate multiple payments into one
• Lower monthly payments
• Structured timeline for repayment
• Reduced interest rates
• Potentially waived fees

Disadvantages

• Temporary impact on credit score
• Fees associated with debt management plans
• Restrictions on using or getting new credit
• A missed payment can result in more fees and interest

Alternatives to Debt Management Plans

Before committing to a debt management program, consider the various alternatives after weighing the pros and cons for your finances.

Debt Consolidation Loans

Debt consolidation loans, like the ones we offer at Tower Loan, are traditional installment loans that you can repay in monthly installments over a fixed amount of time. The APR and interest rate are fixed over that repayment period, making them advantageous over credit cards and other types of revolving debt.

You can potentially get a lower interest rate when you consolidate multiple debts into one loan. However, a loan could impact your credit score, and you will want to review the loan’s terms and fees carefully.

Balance Transfer Credit Cards

Another option is a balance transfer credit card, which transfers high-interest debt to a card with a 0% introductory APR.

For certain people, this can be an attractive alternative to a debt management plan. However, you will likely need a qualifying credit score to take this approach, and fees may be involved. Also, promotional rates do not last forever, so check the date when they expire.

How Debt Management Affects Your Credit

One of the biggest questions debtors ask financial advisors is how debt management affects their credit. The initial impact on your credit score is because of utilization ratios and account closures.

There are also long-term effects of debt management, but over time, there is also the potential for you to improve your credit score as you pay off your debts and your credit utilization decreases. Something else important to know is that when you enroll in a debt management plan, it is noted on your credit report but not directly factored into your credit score. 

Is Debt Management Right for You?

So, what is debt management for you specifically?

Ideal candidates for debt management are people with high amounts of unsecured debt. Debt management is often recommended for people with a debt-to-income ratio of at least 36% and with high amounts of credit card debt.

People who want to achieve a stable income and are capable of making consistent payments are well-suited for debt management. If you want to avoid more drastic financial approaches like bankruptcy, debt management might be a good solution for you.

However, you might want to avoid debt management if you want to keep using your credit cards and if you are having trouble paying your mortgage, car payment, or other secured debts. If you struggle to pay for basic necessities, like food and shelter, a debt management plan alone might not be enough for you to get your head above water. Also, this may not be the best approach for you if you don’t have a steady income and are worried about being able to make monthly payments.

Keep these considerations in mind as you think about whether debt management is right for you.

• Review your budget to make sure you can make debt management payments
• Assess how able you will be to avoid using your credit card during the plan period
• Determine how necessary it is for you to have access to emergency funds
• Think about whether any of the debt management alternatives make more sense

Choosing the Right Debt Management Approach

Once you’ve decided to go this route to address how to manage debt, it’s time to settle on the right approach to move forward.

Factors to Consider

• Current interest rates
• Any applicable fees
• Your total debt amount
• Types of debt you have
• Your personal financial goals
• A reasonable timeline for repayment

Evaluating Credit Counseling Agencies

• Choose nonprofit, accredited agencies
• Get word-of-mouth recommendations or read reviews
• Understand the fees involved
• Learn about agencies’ completion rates

Moving Forward and Beyond Debt

We hope you now understand better how debt management can be a valuable financial tool to regain control over your money and future purchasing power. Whether you pursue a debt management plan or explore an alternative, such as a personal loan for debt consolidation, it’s essential to weigh all your options and understand the risks and benefits of each.

It is also highly recommended to consult a credit counselor or other financial professional if you have questions about debt management plans or whether one is a good option for you.

We are also here to help you with your finances at Tower Loan. You can visit one of our over 240 branches across six states at a location near you or check out our FAQ page for answers to questions many people have about loans as a responsible financial option.