Pros and Cons of Consolidating with a Debt Management Plan
Consolidating your debt is a potentially helpful way to simplify your finances and save money in the process. Many debts become one debt, ideally with a more manageable monthly payment.
There are many ways to consolidate your debts, and while loans, balance transfers, and settlement may be the better known options, there's another choice you may want to consider: a debt management plan (DMP). A DMP has many of the same features of other consolidation options with some significant twists that may make it a better choice depending on your circumstances. With that in mind, let's take a look at the pros and cons of using a DMP to consolidate your debts.
Pros of consolidating debt with a debt management plan
Simplified repayment
Although a debt management plan isn't a loan, it does combine all your unsecured credit card debts into a single monthly payment. That payment is made to the agency managing your DMP, and is then distributed to each of your participating creditors.
When working with a nonprofit credit counseling agency like MMI, your proposed DMP payment has to be affordable and work for your budget.
Reduced interest rates
Because the DMP isn’t a loan, there is no single interest rate for the entire program. Individual creditors, however, will often reduce your interest rate if you repay your debts through a DMP.
In 2023, the average interest rate for accounts included on a DMP with MMI was 7.08%. The average starting rate for those accounts was 27.4%. Because of those massive interest rate reductions, clients can save a ton of money. On average, MMI clients complete their DMP in 49 months and save over $40,000 in the process (as compared to making minimum payments with their original interest rates).
Maintain flexibility
Unlike other forms of debt consolidation, you can cancel a debt management plan at any time if you don’t think it’s working out for you. Once canceled, you would resume making monthly payments to your creditors or seek out another consolidation option.
No credit requirements
Consolidation loans and balance transfers may be off the table if your credit has been damaged by past missed payments. Even if you do qualify, if your credit isn't pristine you may not be able to access the best rates and terms.
A DMP, however, has no credit score requirements. If you've missed payments, or even if some accounts have already charged off and been sent to collections, a DMP may still be able to help you.
Ongoing support
A DMP that's managed by a credit counseling agency like MMI will include initial financial counseling and ongoing support throughout the life of the program (and beyond). These counselors will help you create a budget, connect to valuable resources, and learn important money management skills. With a DMP, you don't have to take the journey to financial freedom all alone.
Cons of consolidating debt with a debt management plan
Not every creditor is guaranteed to participate
Debt management plans only really work when your creditors are willing to participate and offer you benefits for using the DMP. Nearly all major credit card providers will offer some benefit for using the plan, but it’s not a guarantee that every one of your creditors will participate.
If you're unsure if your particular creditors will participate in a debt management plan, complete a free online financial analysis. We can show you what a DMP would look like for you and counselors are available to answer questions by chat, email, and phone. There's no commitment, either, so you can decline the DMP if it isn't right for you.
Your credit cards will be closed
In exchange for offering reduced interest rates and other benefits, creditors will almost always close your credit card account once it’s been included on a DMP. Once a creditor account is closed it typically can't be re-opened, so if closing your accounts is a dealbreaker you may want to look at other options.
Fortunately, most MMI DMP clients are allowed to keep one credit card open during the program to help pay for essentials and emergencies.
Closing your accounts may cause your credit score to drop. This is usually only temporary. The most important factor in your credit score is your payment history, so making consistent payments through a DMP can quickly build your credit back up.
There are fees associated with a DMP
Even if you work with a nonprofit, DMPs usually come with a one-time set-up fee and an ongoing monthly fee. These fees are determined by a combination of where you live, how many debts you're repaying, and how much debt you're paying off. Fee waivers may be available if your income falls below certain thresholds.
At MMI, our DMP fees are capped at $59 per month and $75 at start-up, though the averages are much lower ($25 and $39, respectively). More importantly, these fees never exceed the amount that you're saving by using a DMP.
Not sure which consolidation option is right for you? MMI offers free financial analysis, online and over the phone. Let us take a look at your debts, income, and expenses and show you the best options for getting out of debt for good.
