Getting out of debt for many people is like losing weight. As easy as it was to rack-up, just like those few extra pounds, it now seems overwhelming to clear up. Most don’t know where to begin. If they do, they may lack the motivation to start. Turning to a credit union for support can be a great first step. Many offer programs that help members strategize and implement custom plans to help drive behavior change and improve overall financial health.
The heart of the credit union mission is to encourage frugal smart spending, consistent saving, prior planning, and the wise use of credit among members, all of which lead to good financial health. Credit unions understand the journey to financial health for many members includes roadblocks and detours along the way. And although many members exhibit similar financial hurdles, no two situations are the same. There is no ‘one-size-fits-all’ solution, so credit unions equip members with various tools and resources to support each situation.
One of those tools is the Debt Management Plan (DMP), a debt repayment solution for members who feel buried by unsecured debt. The DMP can help members get out of debt faster, typically by lowering interest rates, eliminating specific creditor fees, and offering up a payment schedule. As a voluntary agreement between borrower and creditor, the DMP offers a consolidated repayment plan for unsecured debts. On the DMP plan, the borrower pays one lump-sum payment (monthly) to the DMP administer and they distribute it to all the creditors, simplifying and standardizing the repayment. Typically, it takes 36 to 60 months to pay the debt in full.
As with any debt-solution strategy offered to members, determining when to use a Debt Management Plan will be helpful as the journey towards improved financial health begins.
To determine if the DMP is a good fit, members should consider the following criteria:
- Stops most collection calls and reduces or eliminates penalty fees
- Lower interest rates – saving thousands of dollars and often lower monthly payments
- Offers consolidation without a loan and pays off the debt in 3-5 years
- Convenience of one monthly payment
- Avoids bankruptcy, and the average score after finishing the program is about 660
- FREE budget counseling session offered beforehand to weigh options
- FREE ongoing budget help with recommendations and action plan development
Remember, not every solution fits each member’s needs. While the ideal candidate for a DMP might be someone who is buried in credit card debt with a small surplus in their budget, it may not be suitable for the member who is struggling to make ends meet with other types of debt, such as mortgages, car loans, student loans or collections.
Other criteria of the DMP that members should consider are:
- All revolving accounts are closed except for one card
- No new credit may be opened during the repayment period
- Late payments on the DMP may lead to the plan’s cancellation
- Credit scores may be impacted early during the repayment period
Although credit scores may be impacted early during the DMP process, most recover and often improve by completing the plan. The early effect on scores likely occurs due to the closure of revolving credit, which may increase the member’s utilization rate. However, the truth is if a member’s accounts are maxed out, and they are making late payments (a perfect example of a good DMP candidate if they can afford it), their credit has already taken a hit. Over time, members should realize increases in credit scores due to bringing accounts current, positive payment history, the absence of credit inquiries or new accounts, and ultimately reducing debt.
While there are certainly instances where it makes sense for a member to choose an alternate debt solution strategy, the benefits of paying off unsecured debt through a DMP outweigh the possible initial credit score hit. Completing a DMP plan may put a member on a shorter and more direct path to improved financial health, eliminating a few roadblocks or detours along the way.