The average American consumer is carrying around a balance of under $5,589 on their credit cards as of 2022. This number has been steadily increasing over the years, with more and more people using credit to make ends meet.
Credit cards can be a handy way to make purchases but can also lead to mounting debt. Debt management is a way to keep up with your bills and get your debt under control. You can use many strategies to manage your debt, including the debt snowball method or working with a credit counseling organization. In any of these cases, you will create a debt management plan that fits your budget and financial situation.
Exactly what is debt management?
Taking control of your finances through careful planning and budgeting is crucial. The objective of an effective debt management plan is to use these tools to help lower your current outstanding debts and work towards eliminating them. By following these steps, you can ensure that you take the necessary measures to get your financial situation under control.
There are two ways to get help with your debt: by creating a debt management plan on your own or through credit counseling. Each option has its advantages and disadvantages.
The simplest way to deal with debt is to create a plan. However, sometimes it can be helpful to have someone else providing help or accountability. Credit counseling services can give you the support and guidance needed to get your finances back on track.
What is the process of debt management?
Debt management plans can help you get a handle on your unsecured debts, like credit cards and personal loans. There are two main ways to go about managing your debts.
Debt management by yourself
Instead of management, consider a do-it-yourself (DIY) approach to debt. You can create a budget to help you pay off your debts and maintain your finances. Two popular methods for doing this are known as “snowball” and “avalanche.”
Who this is best for: If you struggle with overspending but can afford to make monthly debt payments by being more disciplined, this approach could work for you.
Most significant advantages: One way to improve your credit rating is by making your monthly payments on time and in full. However, this may not be easy to do alone. Setting up a plan that includes specific milestones and a date to have the debt paid off can help keep motivation high during the repayment process.
Most significant disadvantages: Creditors may not be willing to negotiate, which means that professional help may be the best way to get out of debt quickly. Without insight from someone who knows what they’re doing, it’ll be challenging to make headway.
Budget calculators, repayment calculators, and financial management apps can help keep your finances on track.
Sometimes it may be necessary to negotiate with creditors to lower monthly payments or interest rates. Once a debt is under control, think about whether or not closing an account is the best option.
Credit counseling for debt management
You can find a credit counselor through organizations like National Foundation for Credit Counselors. They usually offer services for both non-profit and for-profit companies. Review reviews and understand any fees that might come with signing up for counseling services.
Credit counseling can help you develop and implement strategies to repay your outstanding balances. Credit counselors may sometimes be able to negotiate debt management plans (DMPs) with creditors on your behalf. DMPs typically last for three to five years. They may involve concessions, such as reduced interest rates, lowered monthly payments, or waived fees. Once each debt is paid off, the creditor may close your account to avoid accumulating any new debt.
Who this is best for: People who want professional help managing their finances and credit score.
Biggest advantages: Debt management plans can help you get out of debt faster and save money in the long run. With a DMP, you will make one monthly payment to the credit counseling agency, which will then distribute funds to your creditors. This can help you get out of debt more quickly and with less damage to your credit score.
Biggest Disadvantages: Under a debt management plan, your access to credit accounts may be restricted, and a counseling agency will manage your debts. A single monthly payment, which may include a monthly fee, will be made to the agency and disbursed to your creditors.
Debt relief company
You have the option to hire a debt relief company. These companies negotiate with creditors and lenders to reach settlement deals that are less than the outstanding balance. This can be a good option for those who are struggling to make payments on their debts.
Instead of making monthly payments to your creditors, you can sign up for a debt relief program and make one payment to the company each month. This payment will be held in an account, and the debt relief company will use it to negotiate with your creditors on your behalf. In many cases, stopping payments to your creditors can speed up the negotiation process.
A settlement will be reached and presented to you. The company you have been paying into will use funds from your account to make the payment. They will also collect a settlement fee.
Who this is best for: Debt relief could be ideal for Individuals drowning in unsecured debt who’ve tried settling on their own without much luck or would prefer not to file bankruptcy.
Biggest advantages: Debt settlement offers can help reduce your monthly payments and get debt-free faster. By negotiating with your creditors, you may be able to lower the overall amount owed and save money in the long run.
Biggest disadvantages: There is no guarantee that your creditor or lender will accept a settlement offer, which could mean going to court and damaging your credit score. You may also owe federal income tax on any forgiven debt exceeding $600.
How does debt management affect your credit score?
Debt management can be a helpful tool to get your finances under control. However, knowing that debt management can also hurt your credit score is essential.
When you’re trying to get your debt under control, hard inquiries can happen. For example, say you ask your credit card company for a lower interest rate. They may do what’s called a hard inquiry into your credit report. Hard inquiries stay on your credit report for two years and can affect your credit score for one year.
Despite the initial impact, this is only a temporary effect that can be easily remedied by other means. For example, by lowering your interest rate so that you can consistently make your monthly payments, you will see a positive effect on your payment history – which comprises 35 percent of your credit score calculation.
Payments that have been missed
Your credit score will take a significant hit if you miss any payments, so staying on top of your finances and making consistent payments is essential. However, you may be able to negotiate a better rate with your creditor by withholding payment, although this will likely cause your credit score to go down in the short term.
Your credit utilization is a critical factor in your credit score. This number, which makes up 30 percent of your score, represents the amount of debt you have compared to your available credit. An ideal utilization rate is between 10 and 30 percent, meaning that your debt should be no more than 30 percent of your total credit across all accounts.
Consolidating all your debt into one bill can be highly beneficial when it comes time to pay things off. However, closing some of your accounts will affect your credit mix, which is responsible for 10 percent of your credit score. Your credit history will also be impacted as it accounts for 15 percent of the score.
Dealing with debt in other ways
There is no one-size-fits-all solution to debt management. The best option for you depends on your current financial situation.
Credit cards with balance transfers
Introductory interest rate periods on credit cards can be a great way to manage debt and save money.
It’s essential to know the fees associated with this type of transfer, as they can add up quickly. In most cases, you’ll also have to pay a fee for each transfer. Additionally, unless you’re transferring your balances to a card that has already been approved, you may end up with a hard inquiry on your credit report.
Credit cards with zero percent interest periods can be a great way to pay off debt, but you’ll need a good credit score to qualify. Make sure you plan to repay your debt before the zero percent interest period ends, or you’ll be stuck paying high-interest rates on any remaining balances.
A lump sum of money to pay off your debt may be appealing, and a more extended repayment period can sound more manageable. But with a loan, you will be expected to repay the entire amount by the end of the specified period. So before considering a loan as an option to get your debt under control, be sure you can make the payments.
The interest rate you’ll pay on a personal loan depends on factors like credit score and debt-to-income ratio. Loan rates can range from 5 to 36 percent, so comparing offers is essential to find the best rate for you. Bankrate’s loan calculator can help estimate rates for some of the top loans on the market.
Do you need debt management?
Debt management can be a helpful way to get out of debt, but it isn’t a cure-all. You might have to explore if you:
- Have multiple high-interest, unsecured debts like credit cards.
- You’re nearing or at the maximum credit limit for each account.
- Have reliable income to make your payments.
- Don’t anticipate needing to open a new credit account during your DMP.
- I prefer that an agency or company negotiate your DMP rather than DIYing it.
- Have addressed risky financial habits, like overspending.
Debt can be a heavy burden, and finding a way to get rid of debt can be even more challenging. But there are debt management options available that can help, like the debt snowball, debt avalanche, DMPs, and debt settlement. You can find the relief you need and deserve with some research and effort.
Some strategies can have lasting adverse effects, while others may be more suitable for your situation. It’s essential to weigh each method’s benefits and drawbacks before deciding. You can repay your debt quickly and get your finances back on track with careful planning and execution.