Debt management plans (DMPs) are a simple and effective debt solution. Particularly, high-interest debt like credit cards and payday loans. DMP help Canadians save money by merging credit card payments into one affordable monthly payment and lowering (often, even eliminating) interest.
DMPs have gained popularity, and as such, a lot of information about them has flooded the internet. Which is great, because it’s a financial tool worth knowing about. However, that also means there are a lot of misconceptions about what they are and how they work. It’s important to separate fact from fiction. Here, we clear the air by dispelling some of the most common myths.
Myth 1: Enrollment is guaranteed because DMPs are good for anyone struggling with debt
Truth: Enrollment is not guaranteed
DMPs are a great debt relief solution for many people. However, as effective as they are, DMPs are not a universal solution. Some of those enquiring about them are actually advised to choose an alternative because a DMP is not their best option. DMPs are specifically designed to assist individuals who have enough discretionary income to cover essential expenses (like rent, food, and utilities) but are struggling to manage their money because of debt.
During an initial call, which is often free, a Credit Counsellor will work with you to create a budget. This is to ensure they can meet their obligations and still pay the monthly DMP payment. If the budget shows that there isn’t enough cash flow to do this, the counsellor will recommend another solution.
Myth 2: Debt Management programs hurt your credit score permanently
Truth: Any initial drop is usually temporary, and scores typically rebound significantly upon completion.
There’s a lot of confusion around whether DMPs hurt your credit score. Let’s clear things up. DMP agencies generally do not report to credit bureaus, meaning the act of receiving credit counselling or joining a DMP should have no direct negative impact on your score.
However, when enrolling in a DMP, participants are often required to close any credit accounts included in the program. Closing multiple accounts simultaneously reduces your available credit, which negatively impacts your credit utilization ratio, a key deciding factor of a credit score. This often causes a temporary dip in your score.
There’s another piece to clearing up this myth that falls under the category of hard truth. People looking to enroll in a DMP have often already been struggling to keep up with debt payments. Making full payments on time is the biggest deciding factor when it comes to calculating a credit score. Sadly, that means by the time someone is looking into doing a DMP, their credit score has typically already taken a hit.
The good news is that any additional drop is usually very temporary. Scores typically rebound and continue climbing as you reduce debt through consistent, on-time payments. Completing a DMP will help speed the rebound process along because debt payments are more manageable.
Myth 3: All Debt Management Plans and agencies are the same
Truth: Plans vary based on consumer needs, and the agency you choose matters greatly.
Not all DMPs are alike. A certified credit counselling agency, especially a nonprofit one, will tailor a plan to fit the consumer’s specific needs and goals. They will take into account many factors, such as:
- Your budget
- Amount of debt
- Type of debt
- The creditors involved
- Regulatory guidelines
This myth also brings up the critical issue of credibility. Sadly, due to its nature, the financial services industry has attracted those who don’t carry others’ best interests to heart. It’s strongly recommended that anyone looking to do a DMP do their due diligence in researching the company they’re considering working with thoroughly. Some good guidelines to follow are:
- Look for good reviews, especially those on third-party review sites like the Better Business Bureau and TrustPilot.
- A legitimate agency will never ask for money up front.
- It’s best to go with an agency that has a physical location and verify the authenticity of the location.
- Be wary of any offers that are “too good to be true”.
Myth 4: Doing a DMP will solve all my financial problems
Truth: DMPs are just the beginning of financial health
DMPs are meant to be a tool to help people get back on their feet financially. Once someone has completed (even before completing really) the program, it’s up to them to maintain their new financial footing. Credit Counsellors will have a full range of resources available to share on topics like:
It’s important that participants use these resources to learn and implement solid financial skills while doing a DMP. Doing so will help them set themselves up to weather any financial storms that hit each of us at one time or another in life. Regaining financial health is just the first step; the ultimate end goal is financial resilience.
Myth 5: Struggling financially means I’m a failure
Truth: Finances don’t come naturally to most people, and that’s okay
We humans sometimes have a habit of being hard on ourselves. Try to embrace the idea that facing a financial setback is nothing more than a financial setback. It’s not a reflection of who you are. We all face various struggles at times, and finances just happen to be the one that those doing a DMP are facing. The good news is, there are many pathways through financial challenges and a lot of resources out there to help. In other words, there is hope for finding a way to manage money that works for you. It’s just a matter of learning and trying things until you find it.
Wrap up
DMPs are a lesser-known debt relief option, and as such, have a lot of misconceptions floating around out there about them. It’s useful to separate fact from fiction because, while DMPs aren’t for everyone, they are a huge help to those they are right for. If you’d like to learn more about them, the trained Credit Counsellors are ready to help. Call for a free, no-obligation consultation.
