Negotiation

• The major way in which debt management plans reduce interest is by negotiating directly with the creditors. Credit counseling companies have established relationships with the creditors and often can secure lower interest rates for the borrower. Creditors might be more willing to lower interest rates for someone in a debt management plan than someone who contacts them directly.
  
  

Extra Payments

• As some debts are paid off, the debt management plan also reduces the amount of interest consumers pay by applying extra payments toward other debts. Because the monthly amount the consumer pays the credit counseling company never changes, the credit counseling company applies excess funds toward paying down principal faster and therefore reducing the amount of interest paid by accelerating the payoff of the debt. Debt management plans will make payments for the consumer's greatest benefit by applying money toward the debt with the highest interest rate first.
  
  

Time Frame

• As soon as an individual enrolls in a debt management plan, the credit counseling company alerts the creditors, who often lower interest rates in response to the enrollment. Debt management plans typically last for three to five years, depending on the extent of the debt.
  
  

Warning

• Some companies that pose as credit counseling agencies do not actually follow through with their commitments. Although they might reduce interest rates, they also might charge high fees that cancel out the consumer's savings on interest. Some unreliable companies fail to make payments, causing interest rates to jump to their high-penalty rates. If a company is promising to reduce all interest rates to zero percent or something similar that sounds too good to be true, it probably is. Bankrate.com recommends checking a company's reputation with the Better Business Bureau and getting a full list of fees before paying for any services. Before enrollment in a debt management plan, the credit counselor should review the debts, help make a budget, offer specific advice and provide an estimate of the savings due to interest rate reductions along with the initial and ongoing fees associated with enrollment.
  
  

Considerations

• Although debt management can reduce interest, consumers might be able to avoid enrolling in debt management and paying the associated fees by handling their debt themselves. Some borrowers might be able to cut back on unnecessary expenses, call their creditors directly to negotiate lower interest rates and use the fees they would have spent on outside services to make higher monthly payments on their own. Savings on interest through this method could be as much as they would have been on a debt management plan.