What is Debt Management? | The bank rate
Many of us know that setting financial goals and creating budgets can help us manage our money. However, managing your debt is also important. Most Americans have at least one credit card on them, and average credit card balance is just under $5,400 in 2020.
Debt management is a way to keep track of your bills, especially if they seem to be spiraling out of control. You can use many strategies to manage your debt, including debt snowball method or work with a credit counseling agency. In all of these cases, you will create a debt management plan that fits your specific budget and financial situation.
What is Debt Management?
Debt management is a way to get your debt under control through financial planning and budgeting. The goal of a debt management plan is to use these strategies to help you reduce your current debt and move you towards eliminating it completely.
You can create a debt management plan for yourself or go through credit counseling to help you with your project. Both ways have advantages and disadvantages. Making a plan yourself is the easiest way forward, but sometimes it can be helpful to have an outside partner provide support or accountability.
How does debt management work?
Debt management plans are meant to deal with unsecured debts like credit cards and personal loans. Debt management generally takes place in two ways.
DIY debt management
The first option is a DIY version of debt management. In this version, you create a budget that will allow you to pay off your debts and maintain your financial stability. The debt snowball or avalanche of debt The methods are DIY versions of debt management.
You can use budget calculators, reimbursement calculators and money management apps to help you stay on track. If needed, you can also negotiate with your creditors to try to lower your monthly payments or interest rates to help reduce your debt. Once you have debt under control, you can decide whether you want to keep or close an account.
Debt management with a credit counselor
The second form of debt management is through credit counselors. You can find a credit counselor in your area by National Foundation of Credit Counselors. There are non-profit and for-profit credit counselors. Read reviews and understand the fees you may be charged before signing up with a credit counselor.
A credit counselor will help you develop a plan for repaying your debt and can negotiate a payment plan with your creditors. This payment plan is intended to help you eliminate your debts. Depending on your situation, your credit counselor may close your accounts as each debt is paid off, to avoid creating new debt.
Is debt management right for you?
Debt management can be a useful tool for releasing debt, but it’s not a silver bullet. Debt management does not deal with secured debts like mortgages. Another important thing to note is that debt management does not prevent your bills from coming. For debt management to work, you must have enough income to cover your existing bills.
A debt management consultant may be able to negotiate a monthly payment or a lower interest rate, but bills will still need to be paid on a regular basis. And missing an invoice is not a good option. Not only will this negatively impact your credit score, but it may also cause your creditor to cancel your negotiated repayment plan. This will leave you at square one with your debt.
Does Debt Management Affect Your Credit Score?
Although debt management can be a useful tool for getting debt under control, it can have negative effects on your credit score.
For example, if you are trying to get a lower interest rate, you can trigger a difficult investigation in your credit report. Serious inquiries stay on your credit report for two years and can impact your credit score for up to a year.
However, this is a short-term effect that can easily be countered by other factors. For example, if you manage to lower your rate, which means you are able to pay your monthly bill consistently, you will see a positive effect on your payment history, which accounts for 35% of your credit score. calculated.
Although regular payments have a positive effect on payment history, missing payments will cause your credit score to drop significantly. If you, or your credit counselor, use a tactic of withholding payment from your creditor to get a better rate, expect your credit score to drop.
Use of credit
Another key factor in the health of your credit score is your use of credit. This factor accounts for 30% of how your score is calculated and relates to the amount of debt you carry versus the amount of credit you have. The ideal use of credit is between 10 and 30%. This means that your debt must not exceed 30% of your available credit on all accounts.
Consolidating all of your debts into one bill can be beneficial for paying off fees. However, if you close some of your accounts, you will affect your credit mix, which is 10% of your credit score, and your credit historywhich represents 15 percent.
Other financing options to manage debt
When thinking about how you will manage your debt, choose an option that best suits your current financial situation. Debt management is one way to manage debt, other options are worth considering.
Credit cards with balance transfer
Balance Transfer Cards may offer you the option of transferring your debt to a zero percent introductory interest card. This will give you the opportunity to pay off your debt without having to worry about interestsyou. Balance transfer cards do have fees, however, including a fee for each balance transfer in most cases. If you don’t transfer your balance to a pre-approved card, you may face a thorough investigation of your credit report.
Balance transfer cards are available if your credit score is in a good to excellent range, but may not be available if your score is in a lower range. You will also need have a clear plan to pay off your debt before the end of the zero percent interest period, as you will then be subject to the regular variable APR on any remaining balance.
Personal loans give you the chance to receive a lump sum of money which can pay off your debt in one go. A personal loan is a good option if you know you will need more time to get your debt under control. Personal loans offer a repayment period that generally ranges from two to seven years. Unlike a credit card, you will be required to repay your personal loan at the end of the specified period.
Your interest rate for a personal loan will depend on your credit score. Interest rates for personal loans can range from 5-36%, so make sure the rate you receive is lower than the rate you are currently paying on your outstanding debt. Bankrate has a tool that can estimate your interest rate for some of the best personal loans on the market.