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.
Creditors monitor your spending activity
There’s a chance you’ll have a credit card that isn’t included in your DMP. Perhaps you have a credit card with no balance or you keep one for emergencies. If that’s the case, you might not be required to close the account, but it’s probably not a good idea to use that card either. This is because the creditors who are involved in your DMP can monitor all of your spending and if they notice that you are accruing more debt, they might ask you to close the account.
Credit cards make it harder to accomplish your goal
For many people, a debt management program is a way to regain control of their finances and build a stronger financial future. The goal of the program is simple: no more debt. Using a credit card while you’re on a DMP makes it harder to accomplish that goal. While you’re on a DMP, cash is king.
That said, depending on the circ*mstances you may be allowed to keep an emergency credit card (not included on your DMP) open in case of emergencies. Just ask your credit counselor when discussing your plan.
FAQs
Can I use a credit card while on a debt management plan? Creditors typically require that credit card(s) included in a DMP be closed to prevent additional charges. You may be allowed to keep one card open and off your plan for emergency purposes.
Can I still use a credit card on a DMP? ›
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.
Can you still use credit cards during debt consolidation? ›
Yes, although it depends on your situation. If you have good credit and a limited amount of debt, you probably won't need to close your existing accounts. You can use a balance transfer or even a debt consolidation loan without this restriction. Getting a balance transfer credit card never comes with restrictions.
Can I keep a credit card on a debt management plan? ›
Most credit card issuers will require that an account entering a debt management plan be closed. It may be in your best interest to reach out to creditors first and request that your accounts be closed. You may be allowed to keep a card for emergencies or business, though; ask before you sign up.
Can you apply for credit card while in debt relief program? ›
It is possible to get credit while on a DMP, and there may be circ*mstances in which it's advisable. But if you're on such a plan because you were having trouble making your payments on time, adding more debt while you're still in the process of eliminating your old debt is asking for trouble.
What is the maximum debt for DMP? ›
There's no maximum or minimum debt level needed to enter a DMP, but there are some things to consider before applying. A DMP is good for those who are struggling to keep up with their debt repayments, but who can afford to consistently pay smaller amounts over a longer period of time.
Does a DMP hurt your credit? ›
The idea of having a notation on your credit history may initially send up red flags. But while a debt management plan does affect your credit history, it does not have a lasting negative effect on your credit score. When you agree to close all of your credit accounts, your credit history stops.
Can I still use my credit card after debt settlement? ›
The short answer is Yes, people are generally allowed to use their credit cards after debt consolidation as it does not typically involve closing credit card accounts.
How hard is it to get a credit card after debt consolidation? ›
Key Takeaways: A secured credit card is the easiest type of credit card to get after debt settlement. Keeping credit card balances low and paying on time will help raise your credit score. Many credit card issuers offer second chance cards and credit building cards.
What happens to your credit if you do debt consolidation? ›
Future payments
Payments at least 30 days late on your new consolidated loan can sink your score. However, if consolidation helps you pay on time, your credit score will likely improve over time.
Getting a DMP will usually lower your credit score. This is because you'll be paying less than the originally agreed amount, which will be shown on your credit report. Reduced payments show you're having difficulty repaying what you owe, so lenders may see you as high-risk.
Is a DMP worth it? ›
A DMP may be a good option if the following apply to you: you can afford your living costs and have a way to deal with any priority debts, but you're struggling to keep up with your credit cards and loans. you'd like someone to deal with your creditors for you. making one set monthly payment will help you to budget.
How long does a DMP last? ›
How long does a DMP last? There is no set time for a debt management plan to last. It will simply go on for as long as it takes you to pay off your debts. You can reduce the length of time by increasing your repayments but if circ*mstances change then the time it takes to complete can be increased.
Can you get a credit card while on a DMP? ›
Although you can obtain credit, it is important to know that it will be significantly more difficult to access due to the impact a DMP has on your credit file. This may mean that the options available are high interest options, that could leave you in a challenging position once more.
Do I have to close my credit cards with a debt consolidation loan? ›
Debt consolidation doesn't automatically close your credit card accounts. But if keeping an account open tempts you to rack up more charges, then it might be a good idea to close the account. However, you might damage your credit scores by closing the account.
Do I have to include all my debts in a DMP? ›
Make sure all of your debts are included in the DMP. Do not leave out debts for any reason, including: You think you can manage some payments or. You want to keep your overdraft 'for emergencies'
How long after a DMP can I get credit? ›
They are removed six years from the date it happened. Even if the debt is not fully repaid. Improve your credit score by using credit sensibly when your DMP ends you can.
Does Capital One accept DMP? ›
Credit cards
A DMP is primarily designed to help you find relief from credit card debt. This includes: General purpose credit cards, like Capital One and Chase.
Can you use credit card to pay debt collector? ›
Some collection agencies accept credit card payments as a form of settlement for the debt. However, be aware that using a credit card to pay collections may incur additional fees or interest charges.
Can you get a loan while on a DMP? ›
A debt management plan affects your credit file. Most mainstream banks and lenders will be reluctant to lend to you once they see your credit file and they know you are on a debt management plan. The plan works by you making reduced payments, so defaults will appear on your credit file.
