The Difference Between Debt Consolidation Loans and Debt Management Programs

What Is Debt Consolidation?

Debt consolidation is a strategy for getting out of debt that uses a new loan or balance transfer credit card to pay off your existing balances. Debt consolidation can help you roll multiple credit card balances into one monthly payment and, ideally, save money by lowering your interest rate.

There are two main ways you can consolidate debt:

• Debt consolidation loans are personal loans that you can get to pay off your other debt balances. Then, you make just one installment payment toward your debt each month.
• Balance transfer credit cards allow you to move your existing balances onto a new card with a lower annual percentage rate (APR). Balance transfer cards typically come with a promotional 0% APR introductory rate, which lets you take a break from paying interest for a set period of time.

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Pros and Cons of Debt Consolidation

Pros

• Save on interest: One of the main reasons to consolidate is to reduce the interest rate you're currently paying on your debts. Lowering your rates can help you save money and potentially get out of debt faster.
• Combine your payments: Whether you consolidate debt with a consolidation loan or balance transfer card, you'll use the loan or card to pay off your existing balances. Then, you'll make monthly repayments toward your new, consolidated balance until it's paid off.
• Build credit over time: Making on-time monthly payments to your debt consolidation loan or balance transfer card allows you to build a positive payment history over time. Your payment history has the single largest impact on your credit score, so you may see your score rise slowly over time as a result of making on-time payments.

Cons

• Credit requirements: When you apply for a consolidation loan or balance transfer card, the lender will check your credit to see if you qualify. Generally speaking, the higher your score, the better your odds of qualifying for credit with favorable terms.
• Can lead to more debt: When you consolidate your credit card balances into a new loan, that gives you more available credit and could lead you further into debt. If you aren't positive you can resist the temptation to accrue new balances, consolidation may not be a good option.
• Not always cheaper: If you can't qualify for a cheaper interest rate than the average rate of your current balances, then consolidating may not save you money. Also, if you have a balance transfer card with a 0% APR introductory period, you'll need to pay the balance off completely before the end of the promotional period to avoid expensive interest charges.
• Can lead to an initial dip in your credit score: When you apply for new credit, a hard inquiry typically appears on your credit report, possibly leading to a minor, temporary dip in your credit scores. It can also decrease the average age of your accounts, which could impact credit. That said, scores may improve over time as you reduce your balance and make on-time payments.

Learn more >> Pros and Cons of Debt Consolidation

What Are Debt Management Plans?

A debt management plan (DMP) is a repayment method that allows you to streamline multiple monthly payments into one. That can make managing your debt more affordable and potentially provide relief if your payments are posing a hardship.

DMPs are offered through credit counseling agencies. When you meet with a credit counselor, they'll review your finances with you and suggest strategies for tackling your debt. A credit counselor may suggest a DMP if you're struggling to afford your payments.

Unlike debt consolidation, a DMP doesn't involve taking out a new loan. Instead, your credit counselor attempts to negotiate lower rates or payments with your creditors. You'll make one monthly payment directly to the administrator of your DMP, who then distributes funds to your creditors. DMPs typically come with a small setup fee and ongoing monthly fee. It can take three to five years to get out of debt under a DMP, and you'll likely have to close any credit card accounts that are part of the plan.

You'll want a counselor who's looking out for your best interests, so be sure you're working with a certified nonprofit credit counseling agency. You can find a trustworthy credit counselor by starting your search through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Learn more >> Can a Debt Management Plan (DMP) Save You Money?

Pros and Cons of Debt Management Plans

Pros

• Simplify your payments: One of the biggest perks of a DMP is that it streamlines your monthly payments. If juggling multiple balances is a big source of financial stress, simplifying your payments could provide much-needed relief.
• Potentially save on interest: When you enter into a debt management plan, your counselor may contact your creditors to attempt to negotiate lower interest rates on your behalf. This could help you save money as you work to get out of debt.
• No minimum credit score needed: A debt management plan isn't a loan, so you don't need to have good credit to qualify. That can make a DMP a better option than consolidation if your credit score needs improvement.
• Avoid additional debt: Unlike consolidation, which can open up lines of credit and potentially tempt you to accumulate new balances, a DMP typically requires you to close your credit cards. That puts you at lower risk of taking on more debt.

Cons

• Creditors may not agree to the DMP: There's no guarantee that your creditors will agree to participate in the debt management plan. If a lender rejects your DMP, you'll need to continue making payments to them separately to avoid late fees and damage to your credit.
• Potential for fees: While your initial consultation with a credit counseling agency is typically free of charge, you may be required to pay an initial setup fee and a monthly fee to the credit counseling agency for your DMP. Fees are typically not large, and limits can vary by state; fees are capped at $79 federally.
• You can't use your credit cards: When you enroll in a DMP, you'll be required to stop using your credit cards (your card issuers will likely close the cards in the plan), and you'll also agree not to open any new lines of credit. While giving up access to credit may seem restricting, it's also likely to benefit you as you work to get out of debt.
• Can increase your credit utilization rate: When you close credit cards, your credit utilization ratio, or the percentage of revolving credit you're using, may increase; this in turn can lower your credit scores.
• Only includes unsecured debts: DMPs generally only allow you to include unsecured debts, such as personal loans and credit cards. If you have a mortgage, auto loan or loans that use your property (such as your car) as collateral, you won't be able to include them in your DMP and will need to make payments separately.

Learn more >> Is a Debt Management Plan Right for You?

Should You Choose Debt Consolidation or Debt Management?

Whether you should choose debt consolidation or a DMP depends on your personal financial situation and the nature of your debt. Beyond these two methods, there are other strategies for getting out of debt that may be a better fit—more on this below.

Debt consolidation may be a good option if you have the credit score to qualify for a low-rate personal loan or balance transfer card. Consolidating can make your payments more manageable and help you save money while you pay off your debt.

A DMP may be a better option if you aren't able to qualify for a consolidation loan or if you need more support to get out of debt. If you're feeling overwhelmed by your balances and aren't sure what the best next step is, reaching out to a credit counselor first can help you find clarity. Also, keep in mind that a reputable credit counselor won't push a DMP before they've gone over your finances with you and considered all your options.

Other Ways to Get Out of Debt

Beyond debt consolidation and DMPs, these strategies could help you structure a payoff plan to get out of debt faster.

• Debt snowball method: The debt snowball method is a DIY approach to paying off debt. The snowball method has you target your smallest debt first, paying it off more aggressively while continuing to make minimum payments on your other debts. Once your smallest balance is paid off, you'll move on to the next smallest. The snowball method can be motivating because you'll see your balances (and number of monthly payments) dwindle more quickly.
• Debt avalanche method: Like the snowball method, the debt avalanche method has you prioritize your debts to target them one by one. However, with this method, you'll start by paying off your highest-interest debts first. From there, you'll target the debt with the next highest rate, and so on. This strategy has the potential to save you more money over time.

The methods above can work well when you need a roadmap out of debt and don't want to take on additional loans or credit cards. If your debt is creating a severe financial hardship, however, it may be worth considering bankruptcy. Bankruptcy is a drastic option best considered as a last resort, so it's important to exhaust other strategies first.

Learn more >> What's the Best Way to Pay Off Debt?

The Bottom Line

Both debt consolidation and debt management can provide relief by giving you a plan to get out of debt. When you're feeling overwhelmed by what you owe, setting a timeline and budgeting for repayment can give you more confidence that a future free from debt is within reach.

To see what you owe now, you can check your credit report for free from Experian. You'll see a list of your balances and creditors. You can also sign up for free credit monitoring to get updates to changes to your credit report and score.