Dubai: If you're in debt and struggling to find your way out, you've probably spent a lot of time trying to come up with a fix. But whatever you've tried, it's possible it's just not enough. This is when it helps to choose ‘debt management plans’, i.e. professional help to manage your dues.
“With a debt management plan, a credit counselling agency creates a plan to get you out of debt. You deposit money each month with this agency, who in turn uses it to pay your debts on your behalf as per a payment schedule you agree upon,” said Dubai-based financial planner Mirin Raul.
“When you get on a debt management plan, creditors may agree to waive certain fees or lower your interest rate. Obviously, these concessions could help you get out of debt even faster. However, while these plans can be a lifesaver if you're struggling, they're not for all those who do.”
While debt consolidation requires you to take out a new loan to consolidate your existing debts, debt management doesn't explicitly require a loan at all, explained Zubair Shakeel, a UAE-based wealth advisor. “But most often an overlooked factor is the time it takes for these plans to work.“
Debt management plans can take up to 5 years
“Debt management is a process for paying off debt through creditor concessions like interest rate reductions and late fee forgiveness. You're not taking out a new loan, but instead creating a long-term plan to pay off the loans you already have.”
Since debt management requires you to work with a credit counsellor to create a realistic repayment plan, it can take a while to work your way through one of these plans. Experts see such plans taking two to five years to complete, with the longer timelines reserved for those with the most debt.
That may seem like a long time, but remember that “debt management intends to help you repay all the money you owe. If you owe too much (how much varies depending on your income) on credit cards and other loans, you can't expect your problems go away overnight.”
You may be wondering how debt management plans can help you become debt-free when you're barely keeping up with bills as it is. Credit advisors say you'll make just one payment with a debt management plan, and that payment should be less than the total of all your debt payments now.
Can debt management save you money each month?
The lower payment when on a debt management plan is often the result of waived fees and negotiated interest rates, the advisors further add. Most of the time, your debt management plan will have you move excess funds resulting from lower monthly payments into a savings account.
While debt management is a solution that works for many debt-saddled consumers, credit counselling agencies that offer these plans do charge for their services. Research shows there are some debt management companies that charge fees for their plans, and these charges vary.
On average they're around 17 per cent of the monthly payment. However, these fees are typically offset and more than made up for via savings gleaned from reduced interest rates. “One common alternative to debt management plans is something called debt settlement,” added Raul.
“With debt settlement, you work with a company that offers to negotiate your debts down so you pay less than what you owe. One of the biggest downsides to debt settlement is the fact that debt settlement plans ask you to stop paying your bills, and that can cause your credit score to plummet.”
Debt management should increase your credit score
With debt management, on the other hand, your credit score should actually increase as the process moves along. This is because, over time, your credit utilisation (explained below) will go down as you pay off debt.
“Not only that, but the on-time payments made by your credit counselling agency (as you make your own payments on time) will make a positive impact on your credit score as well,” Shakeel further explained.
“Since your credit utilisation is the second biggest determinant of your credit score and your payment history is the biggest factor, debt management plans can help you raise your credit score by default.”
Bottom line: Debt management plans are not for all
While debt management plans can be helpful for those who see them through, they aren't the ideal option for everyone, credit counsellors reiterate. They also note that debt management is suited for people who are facing a less-severe financial hardship than a typical debt settlement customer.
This means those whose credit card debts are Dh30,000 or less, although there are still plenty of exceptions. For those with a lot more debt than this, you may need more than a reduced interest rate and debt management help to make any progress. Some may want to consider bankruptcy.
“Debt management plans has proven to help you learn to use credit to your advantage. Creating a management plan for how to effectively and efficiently pay off debt is the best case scenario for leveraging debt in your favour, building credit, and instituting financial discipline,” added Raul.
“Once you've established a system and debt is being paid off, you also learn the lesson that having less debt means having more money to save and invest. For that reason and others, debt management is actually a great tool when properly structured and executed.
Ideally, you will take the lessons you've learned paying down debt in a debt management plan and use them to avoid debt in the future.”
Whether you're using a debt management plan or not, you could also sit down and take a look at your spending and create a budget that could allow you to spend less and throw more money toward your debts every month.
If you're considering a do-it-yourself approach, planners suggest starting with a comprehensive list of every creditor with updated balances and interest rates. You also need to know what your required monthly payments are. From there, you should track your monthly expenses to see if you have money available each month that can be redirected to eliminating debt.
Finally, you can create a debt repayment plan that will pay off all your bills over time. Many consumers like the debt snowball method where you focus on paying off your smallest debts first and make minimum payments on the rest.
A debt management plan can do all of the tasks with you, and may be the best option if you're feeling overwhelmed and need help to start.
