Enrolling in a debt management plan
Signing up for a debt management plan may give you more breathing room in your monthly budget, but will it hurt your credit? Not as much as you may think. Using a debt management plan to pay off debt won’t hurt your credit score, but it may make it difficult to qualify for new credit.

Debt management plan: Protecting your credit score
When you enroll in a debt management program, you write a monthly check to a credit-counseling agency and the agency pays your creditors. A debt management plan usually lasts three or four years. A notation stating that you are paying an account through a credit-counseling agency appears on your credit report and remains until the account is paid in full. Paying an account through a credit counseling agency will not hurt your credit score.

Debt management plan: Qualifying for new credit
Participating in a debt management plan could make it difficult for you to qualify for additional credit, and some debt management plans prohibit consumers from applying for new credit anyway.

Some creditors may see that a person is in a debt management plan and decide that they have all the debt they can handle. Other creditors might view participation in a debt management plan as a positive step, a sign that a consumer has taken responsibility for and is serious about paying off debt.

The more a creditor bases a lending decision on a consumer’s credit score, the less a consumer’s participation in a debt-management plan is likely to matter. A typical creditor uses the FICO score. They don’t look at notations on the account. Paying off a big chunk of debt on your own or with the help of a debt management plan will give your credit score a boost.

Debt management plan: Late payments hurt your credit score
What will hurt your credit score? Not debt management plans. Instead, being 30 or 60 days late with any payments can adversely impact your credit rating. Those negative marks hurt your credit score and can mar your credit report for up to seven years.

Debt management plan: Choose wisely
It is very important to choose a debt management plan carefully. If the agency administering the program misses or is late with a payment, it is your credit record that gets impacted. Enrollment and monthly fees for debt management plans vary widely. Some companies may charge several hundred dollars for their services, while others charge monthly fees of $20 or less.

With a debt management plan, a consumer usually gets reduced interest rates, lower monthly payments, no more late fees and fewer calls and letters from creditors. Debt-counseling agencies get their operating money by receiving a percentage of each client’s payments back from creditors.

If you are current on your bills, you may want to try negotiating new payment amounts and lower interest rates with creditors on your own. You never know what kind of deal you may land. And you may be able to make real headway on your debt by simply tightening your belt for a few months and freeing up more cash for debt payments.

Debt management plan: Monitor your debt counselor
If your situation is more serious or you just feel plain overwhelmed, you may want to talk to a debt counselor. If you decide to sign on for a debt management plan, be sure to monitor your credit bills carefully. Is the agency paying your bills on time as promised? You need to be vigilant and look at your statements regularly.

If you discover a problem with bills paid through a debt consolidation company or credit counselor, report the company to a local consumer protection agency or state attorney general’s office. You can also file a complaint with the Better Business Bureau. For more ideas on how to monitor these companies, see some of the suggestions by the FTC on Debt Management Plans.

Related articles

• Debt Management Plans vs Bankruptcy (Bankrate.com)

• Weighing the Options With Credit Card Debt (nytimes.com)

• Get a Handle on Your Debt (alwaysbcmom.com)

• Don’t Carry Debt To Improve Your Credit Score (bargaineering.com)

Examples of Debt Management Companies

• Money Management International
• National Foundation for Credit Counseling
• Balance Financial

Overview
Have you ever tried managing your money by creating a personal budget and sticking to it? Do you find that managing your money works or does it seem like a waste of time? The hardest part about managing your money by creating a personal budget is using information from it to modify your spending habits.

With any household budget when you are trying to manage your money, you should be trying to prevent overspending, not only on the large, more infrequent expenses such as vacations, major repairs, end-of-the-year holidays as well as birthdays, but also on the day-to-day and monthly expenses that you incur throughout the year. Only after you have a handle on what and how you are spending does sticking to a household budget make sense and seem worthwhile. It is important to have control over your expenses, even if money management does seem to be somewhat illusory.

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One recommended approach to managing your money by creating a personal budget is to carefully track your spending during the month and then adjust your budget targets up and down in each category, so that your total expenses never exceed your income.

There are many software programs that can help you create a personal budget to track your expenses, however those programs can only display results based on the information provided by you. It is up to you (and your significant other, if applicable) to designate categories for each type of expense in your household budget.

While those categories in your household budget only need to make sense to you, expenses allocated to those “buckets” should be done consistently so that you can track and compare expenditures over time. It rarely matters what you are overspending on — dining out, entertainment or clothes, for example. What matters more as far as managing your money is knowing where it was spent and how that amount differed from the same time period measured previously, for example, so you determine how and where to best change your spending habits within your household budget.

Whether you would like to buy a new or newer car, put a down payment on a new home, or do a major house renovation project – non-discretionary expenses all of which can run into the tens of thousands of dollars in your household budget, you need to be able to carefully track other costs so that you can build the “rainy day” funds to afford those bigger expenses. And when it is anything other than a one-time non-discretionary expense, tracking costs becomes even more significant so that you stick to the household budget allocated for the project.

Understanding Your Expenses
Tracking expenses is helpful, but managing your money also involves understanding the types of expenses in your budget. Here is a list of some expenses, delineated as fixed, committed or non-discretionary that may impact your household budget. Committed expenses are not required for survival, but they are expenses you commit to for yourself or your family that generally impact your household budget and your quality of life.

Fixed (essential)
Home mortgage or rent
Basic food and clothing needs
Essential household expenses
Basic utility bills
Taxes
Student loans

Committed
Insurance premiums
Charitable contributions
Non-essential utility bills (satellite TV service, internet, phone – land line and cellular)
Health/sports club memberships (for self, and spouse and children, if applicable)
Music lessons (for self, and spouse and children, if applicable)
Sports equipment (for self, and spouse and children, if applicable)

Non-discretionary (optional)
Car purchase
Home purchase
Home renovation
Home repairs
New home appliances
Dining out
Entertainment (e.g., movies, theater, sporting events)
Vacations
Holiday/birthday gifts
Other clothing or consumer goods purchases

Establishing a baseline for what is an acceptable allocation of expenses and keeping a lid on your committed and non-discretionary expenses, compared to your monthly and annual income, will go a long way toward helping you succeed with managing your money by creating and sticking to your household budget. Doing so will also provide you the maneuverability to save for retirement, long-term non-retirement savings, as well as to save for “rainy” day expenses and isolated “fun” expenses that you may not want to track in your household budget.

For a lot of people, part of the difficulty in reducing committed and non-discretionary expenses comes from the need to make big monthly credit card payments. If you’re carrying a substantial amount of non-mortgage debt in your household budget, you should cut up your credit cards and aggressively pay down your debt first before allocating funds for long-term and retirement savings, unless you or your spouse’s employer is contributing a matching amount toward that retirement account. Cutting back on matching funds from your or your spouse’s employer is not a good way to manage your money since it is like leaving free money on the table.

The real secret to creating a personal budget that really works is creating a sustainable structure for your finances, one that balances spending and income and that leaves enough room to handle the unexpected.

Related articles

• How to Get Credit Card Debt Relief (slideshare.net)
• Get Useful Tips About Top 5 tips on how to create a home budget (helpwithdebtnow.com)
• Common Cents: Smart financial moves for ‘empty nesters’ (westseattleherald.com)