Debt management plans and credit card hardship programs can offer relief when credit card debt becomes hard to manage. For short-term setbacks, a hardship program is typically cheaper, but a DMP can save you more over time for high-interest debt across multiple accounts.
How Debt Management Plans and Hardship Programs Work
A debt management plan or credit card hardship program can provide relief from credit card debt, but they’re meant for different situations.
“One big difference is that a hardship program is from one credit card issuer, while a debt management plan can apply to many — or even all — of your credit cards,” says April Lewis-Parks, director of financial education and communications at Consolidated Credit.
Debt Management Plans
DMPs are structured repayment programs with a nonprofit credit counseling agency. You make one monthly payment to the agency, which distributes funds to your creditors.
The main appeal of a DMP is making a single monthly payment instead of multiple credit card payments, and the agency typically negotiates lower interest rates and fees. A typical DMP is designed to pay off balances within three to five years.
There are trade-offs to the DMP structure, as DMPs usually have a setup fee and monthly fees that typically range from $30 to $75. If you miss a payment, you may lose the plan’s benefits, including reduced interest rates.
A DMP typically requires closing enrolled credit card accounts, which can affect your available credit, credit age and credit utilization ratio. Closing accounts can create a noticeable dip in your credit score. “A debt management plan restructures your accounts permanently and can reduce your credit score,” says Jamie Strayer, creator and executive producer of “Opportunity Knocks” on PBS. “A credit card hardship program typically won’t harm your credit, because it modifies your existing account temporarily.”
Strayer warns that consumers should use a nonprofit credit counseling agency and avoid for-profit debt settlement companies, which can devastate credit and leave finances worse off than before.
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Credit Card Hardship Programs
A credit card hardship program is a temporary relief option you set up directly with your credit card issuer. Typically available when you have a financial setback — such as job loss or a medical issue — a credit card hardship program can offer reduced payments, lower interest rates or a short-term payment pause.
A typical credit card hardship program lasts six to 12 months and applies to one account at a time. There’s no monthly program fee or third-party payments or negotiations like a DMP.
“Financial institutions do not want loans to go to collections,” says Strayer. “They understand when people experience hardships like the loss of a job, medical emergencies or life disruptions.”
The main downside is that credit card hardship relief is temporary. Once the program ends, your original terms typically return. That can lead to higher payments if your finances haven’t improved. If you have debt spread across multiple accounts, a hardship program won’t address the full situation.
Which Option Saves You More?
Choosing between debt relief options depends on whether you have a temporary or long-term debt problem.
“Some people try a hardship program first and realize a few months later that it didn’t move the needle enough, or other debts are becoming burdensome as well, and they need more help,” says Lewis-Parks. “The difference really comes down to scope. One is a short-term adjustment. The other is a full reset on how the debt gets handled.”
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Hardship Programs for Short-Term Financial Setbacks
Credit card hardship programs can help with temporary financial disruptions, such as job loss or medical leave. These programs can reduce or pause payments on a single account without adding fees and can temporarily lower interest.
Hardship programs don’t charge setup or monthly fees, which can make them a cheaper option for short-term financial challenges.
For example, if you lose income for a few months and have a $5,000 credit card balance, a credit card hardship program can lower your interest rate or waive late fees to keep the balance from growing out of control. If your income recovers and you can quickly pay down the balance after the hardship program, you may spend less overall than in a multiyear DMP with monthly fees.
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DMPs Can Save More for Long-Term Debt
A DMP consolidates high-interest debt from multiple accounts into one monthly payment with a fixed payoff plan and negotiated lower rates.
“A debt management plan typically saves more when someone has multiple high-interest unsecured debts (e.g., credit cards) and needs a structured, long-term solution — not just temporary relief,” says Leah Collins, host of “Maxxed Out” on OWN.
Whether a DMP saves you money comes down to whether the interest savings exceed the monthly fees. You’ll typically pay $30 to $70 per month for a DMP, but a DMP may lower how much you pay in interest each month.
For example, a DMP could take $20,000 in credit card debt across several accounts with interest rates above 20% and put it in a four-year payoff plan with reduced rates. That could save you thousands in interest even after the DMP monthly fees. Without a DMP, you might drag minimum payments out for years with a significantly higher interest cost.
“People focus on relief, not behavior change,” says Collins. “Without changing spending habits, both options can become temporary resets instead of permanent solutions.”
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Debt Management Plan vs. Credit Card Hardship Program: Which Saves You More? originally appeared on usnews.com
