Holiday shopping can be fun when it’s for the people you love, but it can also be draining—to your wallet. A recent survey shows that 50% of cardholders are still carrying debt from the last holiday season. If you’re one of those people, you may want to consider a tighter budget and a debt management program (DMP)—especially with interest rates currently at 20.42%.
What is a debt management plan? You enroll in a DMP through a certified credit counseling agency, where a credit counselor will work with your creditors. This entails reducing your interest rate and consolidating your credit cards into one affordable monthly payment to be paid off in three to five years.
Unlike debt settlement companies that charge up to 15%–20% of what you owe, a debt management plan typically costs around $40 per month—but with large payoffs.
A DMP isn’t destructive to your credit score and, over time, will boost it. Read on to find out how a debt management plan can impact you.
1. Your credit utilization ratio may go up
The credit utilization ratio is how much of your available credit you’re using. When you enroll in a DMP, your lenders will typically close your accounts, making your credit utilization go up. This may temporarily impact your credit score since credit utilization makes up 30% of your score. However, as you pay your debt, your credit utilization will go back down, making your credit score go up.
2. You’ll gain a better credit history
Your credit history is worth 35% of your credit score, so when you consistently pay toward your debt, you’re improving your credit history. This will ultimately increase your credit score.
Paying down debt is good for your credit score
While the notation on your credit score that your accounts are in counseling may deter lenders, it doesn’t hurt your score. Ultimately, repaying your debt responsibly shows lenders that you’re a reliable borrower and in turn reflects positively on your credit score with on-time monthly payments.
Get enrolled now to start the new year off right
With two in five cardholders reporting that they’ve either maxed out a credit card or come close and 50% of Americans carrying debt month to month, debt is a problem. Consider enrolling in a DMP so you can start paying down your debt now.
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Knowing your options can help you prepare your finances for the next step, whatever that may be.
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