Can I Use a Credit Card While on a DMP?
If you’re ready to become debt-free, then a debt management plan (DMP), which provides one monthly payment, lower interest rates and ongoing support from certified financial counselors, might be the perfect solution. But before you take the leap, there are a few things you’ll need to understand, like the fact that you probably won’t be able to use a credit card during the duration of the program.
You’re required to close your accounts
Any credit card that is included in your DMP is required to be closed. Here’s how it works — the creditor, which is typically a bank or other financial institution, works with MMI to create a DMP, which usually includes reduced interest rates on your credit card accounts. Lower interest rates are a win-win for you and the creditor because the lower rates make it easier for you to pay your balance, and as a result, ensures that the creditor gets paid. But one of the creditors’ conditions for offering a lower interest rate is that you close the credit card. This ensures that you use the lower rate is used for its intended purpose: debt freedom.
Keep in mind – the agency administering your debt management plan will not (and cannot) close your credit cards. If you don’t close the accounts on your own, your creditor will once the account has been accepted onto the DMP.
You’ll be allowed to keep one account open
While we typically advise DMP clients to close all credit card accounts before starting their DMP, you are allowed to leave one account open in the event of emergencies.
Obviously, you’ll want to use this card sparingly to avoid creating new debt during your program, but if you’re worried about not having any available credit: never fear. You can successfully start and maintain a DMP while keeping one card open.
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Can Your Lender Reject Your Debt Management Plan?
Your lender can reject your debt management plan. Creditors are not required to participate in debt management plans, but they’ll likely do so if they believe it’s the best way to collect the debt you owe.
If you’re struggling with debt and consolidation isn’t an option, a debt management plan can help you pay down your debt over time, often with lower payments and interest rates.
But because a debt management plan may involve paying less than what you originally agreed, lenders may not agree to the terms. If that happens, here’s what you need to know.
How Does a Debt Management Plan Work?
If you’re having trouble tackling your debt, a credit counselor can help by providing you with personalized advice. In some cases, the counselor may recommend a debt management plan.
A debt management plan (DMP) is a debt repayment plan that lasts between three and five years. To set up your debt management plan, the credit counseling agency will negotiate your unsecured debt, such as credit cards and personal loans, with your lenders. This may result in a lower monthly payment, a lower interest rate or both on multiple credit accounts.
Throughout the DMP, you’ll make your monthly payment to the credit counseling agency, which will distribute the funds to your creditors. In exchange, you’ll typically need to close your credit cards and agree not to apply for more credit until you’ve completed your plan.
DMPs typically require a modest setup fee, as well as an ongoing monthly fee. Note that it’s important to work with nonprofit agencies to avoid excessive fees. You can find a nonprofit credit counseling agency through the National Foundation for Credit Counseling or the Financial Counseling Association of America.
Do Your Lenders Have to Accept Your DMP?
While a DMP can provide you with some relief, lenders are not legally obligated to agree to them. Potential reasons why they may refuse your proposal include:
- They’re unwilling to accept the terms of the DMP.
- They don’t approve of your credit counseling agency (particularly if it’s a for-profit agency).
- They believe they can collect the full amount you owe another way.
- They believe that you can afford to pay more than you’re proposing.
- You’re not keeping your discretionary expenses to a minimum.
Note that some creditors may explain their reasons for the rejection and may even offer up some suggestions on changes you can make to your proposal. Depending on the circumstances, you may be able to come to an agreement with some adjustments.
This may involve agreeing to a higher monthly payment or interest rate—albeit still lower than your standard terms—or providing more evidence to show that you can’t afford to keep making payments as originally agreed.
If a lender rejects your DMP or requests changes, consult with your credit counselor to determine your next course of action.
What to Do if Your Lender Rejects Your DMP
If you have one or more lenders that reject your DMP and refuse further negotiations, here are some steps you can take:
- Continue making payments. You may be tempted to stop making payments on those debts, but that decision can do serious financial harm. Not only can it wreak havoc on your credit score, but it can also lead to more dire consequences. For example, the lender may sell your debt to a collection agency, which could sue you for payment.
- Continue paying other debts. If some of your creditors have agreed to your DMP, the reduced monthly payment could free up enough cash to keep up on your debts that weren’t included. Even if that’s not the case, some relief is still better than none.
- Ask about other relief options. Contact the lender that rejected your DMP and ask about other potential options for relief, such as short-term forbearance, a hardship program or debt restructuring.
- Look for ways to increase your income and cut your expenses. While it may not always be possible, review your budget for potential areas you can pare back to make it easier to make your monthly payments. You can also look for opportunities to make more money.
Whatever you do, be sure to speak with your credit counselor to explore all of your options before you proceed.
Track Your Credit Score Throughout the Process
Being on a DMP won’t hurt your credit on its own. But certain aspects of the process can impact your credit score. For example, closing credit cards could cause your credit utilization rate to spike, which can damage your credit score until you pay down your debt.
Because a DMP can impact your credit, it’s important to monitor your credit score regularly to track your progress as you work to pay down your balances. With Experian’s free credit monitoring service, you’ll get access to your FICO ® Score Θ and Experian credit report. You’ll also get real-time alerts when updates are made to your credit report, making it easier to address potential issues as they arise.
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About the author
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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