Your commitment to become debt free through credit counseling can be rewarded through lower interest rates on your credit cards. That’s because creditors want to provide an incentive and a means for you to stick with your plan so that you pay off your debt and avoid a future default.
This incentive plan is called a debt management program (DMP) and it is available to distressed debtors that complete credit counseling. These programs allow you to give up your reliance on credit cards while benefiting from reduced finance charges on your debts.
Interest rates available to debt management program participants were much lower following 2009. This is due to the high number of defaults that credit card companies were struggling to prevent. Their reaction was to improve the rates available through these programs so that struggling borrowers could benefit from the resulting lower payment.
Reducing your interest rates allows for a much higher percentage of your credit card payments to actually go towards your principal payment. Consider one example:
| APR | Finance Charges | Principal Payment | Minimum Payment | |
|---|---|---|---|---|
| Card with $5,000 balance at default rate | 29.99% | $124.96 | $50.00 | $174.96 |
| Card on DMP | 7.40% | $30.83 | $69.17 | $100.00 |
Of course, the impact of this lower interest rate is magnified when you have accounts that are penalized by charging the default interest rate. You can see that the biggest difference is the lower finance charges that this client would pay on this account. This results in the client benefiting from a lower monthly minimum payment while still paying more towards the principal balance before.
Consider a more moderate example:
| APR | Finance Charges | Principal Payment | Minimum Payment | |
|---|---|---|---|---|
| Card with $5,000 balance | 18.99% | $79.13 | $50 | $129.13 |
| Card on DMP | 9.90% | $41.25 | $70.75 | $112.00 |
In this instance, you can see that the minimum payment dropped a more modest 13% on this card. Even with the lower payment, this client sees an additional $20.75 of that payment going towards the principal balance. The drop in finance charges is still quite pronounced, which translates into well over $450 in interest savings the first year on the program.
Interest rate reductions are not automatic, nor are they guaranteed. Each individual creditor has guidelines on what accounts are eligible for program benefits. Also, each creditor establishes the benefits that it chooses to offer through debt management programs.
The interesting part about a debt management program is how it helps you consolidate payments on a number of credit card accounts. Some cards may offer relatively few or even no benefits, while other cards can lower interest rates to almost nothing. The result is that most qualified DMP candidates can expect to see reduced interest rates. Those lower rates in turn can result in moderately lower payments.
Remember that benefits are not available to everyone, and someone that does not need a debt management program should not be enrolled. DMPs are strictly for qualified debtors that have completed credit counseling. Only after completing your budget counseling session with a credit counseling organization can you discover how to lower interest rates through credit counseling.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
Favorite quote:
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."
Thomas Jefferson
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