Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I have a question about debt management plans. Can I put just two credit cards in such a plan or do I have to put my whole debt portfolio
with them? I ask because I need help with the two major ones
with a $20,000 balance. I am fine paying the others. -- Marcus
What you're describing is called
"picking and choosing" in the credit counseling business, and it's highly
discouraged. In a debt management plan (DMP), many of the creditors owed money agree to reduce interest rates and fees for
the debtor in the program.
So why can't you include some of your accounts in the debt management plan but exclude those
that don't lower their rates or
that you can handle on your own? For a couple of reasons. One is the contract
with the creditors, which stipulates that anyone going on a plan must include
all credit card accounts with balances of over $100 -- except for one that may
be used for emergencies. It's a matter of fairness. Why should one lender give
rate concessions and ban charging (thus losing revenue) while their
competitors continue to enjoy you as a customer?
The other reason is that bundling all
accounts with balances is best for the debtor. If your intention is to get out
of debt completely and quickly, it's often wise to cut yourself off
from the possibility of getting into even more debt. Closing
accounts and paying as much as you can until all balances are at zero can be a
great way to achieve that goal. Plans are set up so you make one payment per
month to the agency, which distributes the money to your creditors with the
goal of you being back in the black within five years. (You can expedite
that time frame with higher payments.)
If you really want to keep access to multiple
cards, the debt management plan isn't for you. However, you may be able to simulate a similar
plan. Here's how:
- Determine a fixed
amount you can send. No willy-nilly "what can I pay this
month?" kind of thing. Your payments need to be steady, never dropping below a
set figure. To determine that, review your budget. Pare spending down, add a
bit for savings, and then whatever remains goes to your obligations.
your creditors for an interest rate reduction.
Some credit card companies are willing to give their cardholders breaks on an
individual basis. Call each and find out who will cut you a deal.
- Prioritize payments
by interest rate. Rank your creditors by what they're
charging you. The card with the highest interest rate should receive the most
of your payment, while the others get the minimum. When the first balance is
deleted, keep the payment the same and give the next most expensive creditor
the bulk of it.
- Calculate your payoff
time. Use a debt payoff calculator to get a general idea of how long
it will take to get out of debt by mimicking a debt management plan. Because a credit counselor
will put you on the five-year plan, input 60 months into the desired payoff
time. It will show the amount you'll need to send, but if you can pay more,
adjust the number of months accordingly.
- Suspend credit use
while you're repaying. You don't have to close every card
(as you would with a plan), but do stop charging until you're comfortable living
with these restrictions. After that, you can begin to add positive activity to
your credit report, with a tiny charge every month or two, while continuing to
drive down the balance.
There is nothing wrong with handling
your own accounts if you're committed to the process. There are some clear
advantages to doing so, too. You won't have to open new cards at the end, and
your credit reports won't show that you needed help from an agency.
So the choice is yours: A DIY plan that
you have to actively manage, or a DMP where they do the hard work -- but you
also have to adhere to their rules.
See related: How debt management plans impact credit scores
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