Debt Management: What you need to know
If you’re interested in learning how to get out of debt, you may have heard of debt management. Since no single debt relief option is right for everyone, before you make any decisions, you owe it to yourself to understand the pros and cons of a debt management program versus your other choices so you can get out of debt as fast—and as affordably—as possible.
For some people, debt management can be a good choice.
What is debt management?
In a nutshell, debt management involves lowering the interest rate on a credit card, which reduces your monthly payments to make them more manageable. Here’s how it works:
Debt management companies, also known as consumer credit counseling agencies, work with consumers to secure interest rates that are lower than the ones that consumers receive on their own. Debt management firms can secure these lower rates because they maintain pre-arranged agreements with credit card companies. Through these agreements, creditors can lower rates on a customer’s existing debt to what’s called a “concession rate.”
As part of the debt management process, credit counseling agencies often enroll consumers in a debt management plan (DMP). Under terms of the debt management plan, the agencies collect a monthly fee from consumers. Agencies also earn revenue from the credit card companies, called “fair share” payments. (Agencies’ agreements with credit card issuers determine these payments.)
What to look for in a debt management company
Credit counseling companies are the businesses that offer debt management programs. If you’re looking into debt management, it’s important to know how these companies operate. Here’s what to look for as you choose a debt management program:
If you’re looking into debt management, it’s important to know how these companies operate
- Straightforward information: The debt management program should include materials that clearly explain how the process works, what you should expect, and what your fees will be.
- Trained counselors: Debt management counselors should be certified and trained in debt management, consumer credit, and budgeting.
- Educational materials: You should get educational materials (at no additional cost) as part of your program, so you can carry forward what you learn.
- Budgeting support: A debt management program should include advice on how to manage your debts and your overall budget.
- Membership in industry organizations: Membership in the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA, formerly the AICCCA) tells you that the debt management company adheres to industry standards and best practices.
Red flags about debt management
Many people assume all credit counseling agencies are nonprofit organizations, and therefore provide services for free and operate on the up-and-up. This is not always the case. While there are many reputable debt management companies that charge fees, not all are worthy of your business. Before signing anything, read the fine print and be sure you understand what you’re signing up for.
Here are some red flags to watch for:
- Hidden fees: If the company won’t give you a clear picture of what you’re paying for or the value you are getting, consider that a red flag.
- “Voluntary” contributions: No debt management company should ask you to help them out.
- Advice for sale: A company’s plan should include any promised educational materials or workshops. Watch out for companies that charge extra for educational information.
- Requiring personal details up front: A reputable company will tell you about its services without forcing you to commit. If a company requires specific details about your situation—such as the names and addresses of your creditors, your Social Security number, or your family’s contact information—before explaining what they offer, beware.
You’ll want to make sure that a company offering debt management programs is legitimate before you agree to put your financial future in their hands.
Before you sign up with a debt management company, check its credentials with these organizations:
- Better Business Bureau: Check the BBB page of the agency offering the debt management plan. Read through any complaints, and most important, review how the company deals with complaints. Their approach can give you insight into the company’s customer service and how much it values its customers.
- State Attorney General and your local consumer protection agency: Search these organizations’ sites to verify they are registered as a debt management company and find out if the companies you’re considering have had complaints filed about them by local consumers.
- The United States Trustee Program: Part of the U.S. Department of Justice, the Trustee Program provides a list of credit counseling agencies that are approved to provide counseling before a bankruptcy filing.
Questions to ask a debt management company
It can be hard to know what to ask a debt management company, especially if you don’t know what you don’t know. We’ve got you covered. Ask questions about these areas before signing on with any debt management provider.
How does the debt management company make money? Assure yourself that there is no conflict of interest between your best interests and those of the creditors they work with.
What is the training and background of the employees? How are the company’s employees paid? Do they earn more if you buy services that they promote? The Federal Trade Commission recommends you steer clear of debt management companies that pay employees a commission.
- Range of services and individualization
Does the company provide consultations and advice to consumers free of charge? Or does the company push every consumer into a pre-determined plan, such as a DMP or debt settlement plan? Be especially wary of any company that tries to drive you straight into a plan without thoroughly reviewing your finances, discussing the pros and cons of their program, and/or talking about other potential solutions to your debt problem.
- Free education
Does the debt management program include educational material, such as budgeting and financial advice, free of charge? Many firms consider educational material an additional fee source, not a benefit to their clients.
What is the background of the management team? Look for good, relevant education and experience—not a team that jumps from opportunity to opportunity to make its fortunes.
How long has the company been in business? How many customers have its debt management programs served? Determine if the company and its employees provide service through the life of the program, or if they contract out to others once they have enrolled a client.
What are the company’s dropout and success rates for its debt management programs? Request and review these statistics. They indicate how companies structure resolutions and payment plans for clients. The National Foundation for Credit Counseling (NFCC) has reported that credit counseling companies historically have a success rate of about 26 percent. That means only one-fourth of people who start a plan complete the whole plan.
What are the fees, and how will the debt relief provider assess them? Credit counseling companies assess a monthly fee for each debt enrolled in a DMP. While these fees vary, over the course of five years—the typical length of a DMP—the fees can add up.