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What is Debt Management?


More than half of Americans carry a credit card balance, according to one 2021 study. And data from the credit bureau Experian indicates that the average card balance is more than $5,500. Based on these statistics, it’s easy to see how so many people become overwhelmed by their debt or struggle to make their money payments. To help tackle their debt, many Americans turn to a debt management program. Keep reading to learn what debt management is, the different types of debt management plans, and how to decide which solution is right for you.

What is debt management? Debt management is any system you use to pay off your debt and get your finances under control. The term debt management often refers to debt management programs offered by credit counseling organizations that help borrowers approach their debt in a more manageable way. Whether you DIY your debt management plan or hire a credit counseling organization, debt management requires having a set plan in place to become debt-free in the future.

How Does Debt Management Work?

Debt management can take several different forms. While some borrowers turn to a debt management program to help them tackle their debt, there are alternatives to consider, including taking a DIY approach.

DIY Debt Management

The first strategy you can use to manage your debt is DIY debt management. With this option, rather than working with a professional, you take a DIY approach to tackling your debt. DIY debt management is the most common option that people choose and is appropriate for most people.

The two primary methods of DIY debt management are the debt snowball and the debt avalanche. When using a debt snowball, you make the minimum monthly payment on each of your debts except for the smallest one. Any extra money in your budget should go toward your smallest debt. Once that debt has been paid off, you reallocate all the money you were putting toward your smallest debt to your next smallest debt, creating a snowball effect.

The benefit of the debt snowball is that it provides quick, emotional wins. When you’re able to pay off your first debt, it can provide the motivation boost you need to keep going.

When you’re using the debt avalanche, rather than prioritizing your smallest debt, you prioritize the one with the highest interest rate. You make the minimum monthly payment on all of your debts, with all extra money in your budget going toward the debt with the highest interest rate. Once that debt has been paid off, you move onto the debt with the next highest rate.

The benefit of using the debt avalanche is that in the long run, you save the most money on interest. With the debt snowball, the smallest debt isn’t necessarily the most expensive one. It could result in you paying off the lowest-interest debts first, which would cost you the most in interest in the long run. But with the debt avalanche, you’re always saving the most money.

While the debt avalanche is the most cost-effective DIY debt management plan, it isn’t the right one for everyone. Anyone who struggles to stick to a financial plan and needs the motivation that quick wins provide may do better with the debt snowball.

If you aren’t sure which debt payoff plan is right for you, use Personal Capital’s debt payoff calculator.

Debt Management Programs

Rather than taking a DIY approach to debt management, you could enroll in a debt management program. With this type of program, the debt management company you hire works with your creditors to reduce the monthly payment and interest rates on your debts. They may also be able to waive or reduce any penalties you’ve accrued.

The goal of a debt management program is usually to agree on a payment schedule that allows you to pay off your debt in a certain number of years.

When you work with a debt management program, you often make your monthly payments directly to the program rather than your creditors. Then, the program — often a credit counseling organization — makes payments on your debt based on the payment plans they’ve agreed on with your creditors.

A debt management program may be most appropriate for someone whose monthly debts have become unaffordable. The credit counseling organization works to make your new monthly payment fit within your budget. Keep in mind that most debt management programs require a fee to get started, as well as an ongoing monthly fee.

Debt Management Alternatives

A debt management program isn’t right for everyone, yet you may have tried the DIY route and found that it doesn’t work for you either. In that case, there are some alternatives available to help you manage your debt.

Debt consolidation loan: A debt consolidation loan is a personal loan that you borrow for the purpose of paying off other monthly debts. The benefit of this type of loan is that it allows you to consolidate multiple monthly payments and interest rates into a single monthly payment with one interest rate. While personal loans often have relatively high interest rates — especially for borrowers with bad credit — they’re often used to pay off credit card debt with even higher interest rates. According to Experian, the average personal loan rate is 9.41%, while the average credit card rate is around 16%.
Balance transfer: If you have credit card debt you’re working to pay off but find most of your money is going toward interest, then a balance transfer might be a good option. With a balance transfer, you transfer the balance of one credit card to a different card, usually one with a low introductory interest rate. Many balance transfer cards offer introductory rates of 0% for one year or more, allowing your entire monthly payment to go toward the principal. Be sure to read the fine print because the introductory rate could just be deferred interest and to avoid the interest charge, you may need to pay off the card by the end of the promotional period. A balance transfer is often the cheapest way to manage debt, it’s generally only available to borrowers with fairly low balances and good credit.
Debt settlement: Debt settlement is the process of negotiating with a creditor, who agrees to accept less than the amount you owe. Borrowers often use debt settlement with collections accounts they can’t pay off in full but can pay in part. Like debt management, debt settlement is often done through a third-party company that negotiates with creditors on your behalf. Unfortunately, debt settlement can be expensive and often has a significant and negative impact on your credit, especially because debt settlement companies often encourage you to stop your monthly payments while they settle the accounts. There’s also a chance that your creditors won’t agree to a settlement, in which case you’ll have ruined your credit and paid a debt settlement company for nothing.
Bankruptcy: If your debt has become truly overwhelming, you may turn to bankruptcy as a last resort. With Chapter 7 bankruptcy, many of your unsecured debts like credit cards, personal loans, and medical bills can be wiped out. Because of the effect bankruptcy has on your credit — and the fact that it stays on your credit report for 10 years — it’s best used only when you have no other options. It’s also not appropriate for all types of debt, such as secured debts, back taxes, federal student loans, and more.

Pros and Cons of Debt Management Programs

If you’re considering a debt management program, it’s important to understand all of the pros and cons and how it may affect your finances in the future.


One monthly payment rather than many: Having multiple monthly debt payments can be overwhelming, and a debt management program allows you to consolidate them into just one.
Reduced interest rate: Debt management programs are often able to negotiate lower interest rates on your debt, which allows more of your money to go toward the principal.
Waived or reduced fees: If you have outstanding fees on any of your debt accounts, your debt management program may be able to get them reduced or waived altogether.
Help and accountability paying off debt: For many borrowers, the accountability that comes with a debt management program is the most important step. A third party creates a plan that fits within your budget and helps you stick with it.


Fees required: Debt management programs often require an upfront fee, as well as ongoing monthly fees as long as you’re in the program.
Doesn’t cover every debt: While debt management programs can often cover credit cards and some other unsecured loans, they usually aren’t appropriate for secured debt and can’t cover all unsecured debt (such as student loans).
Less access to credit: While you’re going through debt management, the credit counseling organization may restrict your ability to get new credit and/or require that you close any existing credit cards.

Is a Debt Management Program Right For You?

A debt management program can be an effective tool to help you tackle your debt. These programs are well-suited to certain borrowers — they aren’t right for everyone.

The first thing to consider when deciding if a debt management program is right for you is what type of debt you have. These programs can’t be used for secured debt like mortgages or auto loans. They also can’t be used for certain unsecured debts, including student loans. They’re best suited to credit cards and personal loans.

Next, consider whether the restrictions around debt management work for you. While on this type of program, you often must close your existing credit cards and will be restricted from opening new credit accounts. For borrowers who will need access to credit in the next couple of years, this type of program probably isn’t suitable.

Finally, consider whether you can manage the debt yourself. For many borrowers, the debt snowball or debt avalanche are all the debt management they need.

If you decide that a debt management program is right for you, it’s also critical that you choose a reputable program. The Federal Trade Commission recommends narrowing down a list of credit counseling agencies and then checking out each company with your state’s attorney general, the Better Business Bureau, and local consumer protection agencies. You can see if any of the companies have had complaints filed against them.

Does a Debt Management Program Affect Your Credit Score?

One of the most important questions many borrowers may find themselves asking is whether a debt management program will affect their credit score. After all, other debt solutions such as debt settlement can seriously harm your credit, and it’s important to understand the consequences of any program you’re considering.

There are several ways in which a debt management program can affect your credit. First, this type of program may harm your credit if it requires you to close your credit accounts. Your credit utilization — or the percentage of available credit you’re using — will increase, causing your credit score to decrease.

Another way debt management can affect your credit is by raising or lowering your average age of credit. Closing an older account can harm your credit score since it lowers your average age of credit. On the other hand, closing a new credit account when you have older accounts still open can improve your score, since it increases your average age of credit. Keep in mind that because accounts stay on your credit report after you close them, this change isn’t likely to affect your credit score immediately, whether it’s a positive or negative change.

Next, a debt management program can improve your credit by bringing all of your credit accounts current. If you currently have accounts that are delinquent, they’re hurting your credit score. A debt management program may bring these accounts current, therefore reducing the impact of these negative marks.

Finally, a debt management program requires regular debt payments to the credit counseling organization, which then makes your debt payments on your behalf. Each of these on-time payments will appear on your credit report and help boost your credit score over time.

Remember that debt management only positively affects your credit if you stick to your plan. Just as in any other situation, if you fail to make your required payments, you’ll see those late payments appear on your credit report, and are likely to see your credit score fall.

The Bottom Line

Paying off debt is just one part of your overall financial plan. You can take a few actions now to get yourself on the right track.

Download Better Financial Life, an actionable guide with insights from fiduciary financial advisors. The guide is free.
Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to see all of your accounts in one place, analyze your spending, and plan for long-term financial goals.
Consider talking to a fiduciary financial advisor for more detailed guidance on your strategies for savings and debt payoff.

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