What is debt management? The complete guide

Debt isn’t always a bad thing. Credit cards, personal loans, and mortgages are often necessary to cover major life expenses. Some types of debt carry less risk than others or have long-term gain potential, like a mortgage or student loans, which can lead to home ownership or increased earnings. However, bad debt, like high-interest credit cards, can quickly get out of control, making it harder to get ahead financially.

Debt management helps you focus on paying off bad debt and making all debt more manageable. It can also be an effective tool for regaining control of your family's finances, depending on your debt situation. Here's a closer look at how debt management works and the different types to determine if one may provide a suitable solution for your debt.

What is debt management?

Debt management involves simplifying and organizing monthly debt payments to better fit your budget. The goal is to find a more efficient way to pay off debt and get back on track financially.

Debt management options include credit counseling, debt management programs, debt settlement, debt consolidation, and bankruptcy. Each has advantages and considerations, and some may better suit your needs than others.

How does debt management work?

Each debt management method works differently. So, what is a debt management program, and how does it differ from debt settlement and consolidation? How do credit counseling and bankruptcy work? Here's how each method works to tackle debt.

Debt management plan (DMP)

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Let's start with what is a debt management plan. A DMP is a personalized payment plan for your debt, often set up by a credit counseling agency. The agency works with your creditors to lower interest rates and cancel fees. Then, it creates a repayment plan that fits your budget. You send a monthly payment to the agency, which takes care of your creditors until you're debt free.

Credit counseling

Credit counseling is a free service provided by nonprofit agencies to help you manage your finances. A counselor reviews what you owe and earn, then offers budget and debt repayment tips. They can set up a DMP or simply guide you in getting control of your finances.

Debt settlement

You might consider debt settlement if you're behind on a significant unsecured debt balance and you've ruled out other debt relief options. It means negotiating with creditors to pay less than you owe. You can do it yourself or work with a reputable debt settlement professional who will negotiate on your behalf for a fee. It's a quick fix, but it will hurt your credit.

Debt consolidation loans

Debt consolidation combines all your debts into a single loan, usually with a lower interest rate. You have one manageable monthly payment and can save on interest over time. Some debt consolidation loans have steep origination or processing fees to watch out for.

Bankruptcy

Bankruptcy is the last resort but can provide a fresh start when debt becomes unmanageable. Although it clears most debts, it severely impacts your credit score, staying on your credit report for up to 10 years.

Pros and cons of debt management

Debt management has both upsides and downsides. On the bright side, it can reduce interest rates, wipe out late fees, and give you a clear path to debt freedom. It can also reduce financial stress by rolling all your payments into one manageable amount.

Unfortunately, it's not all sunshine. Some methods, like debt settlement or bankruptcy, can hurt your credit score. You’ll also incur fees with many solutions since you’re getting professional help. And with debt management plans, you have to make your monthly payments on time, every time, or you can undo all your progress.

Impact on credit score

Your credit score is a big deal. Understanding how debt management will affect it can help you decide whether to pursue debt management. 

Your credit score might initially dip when you join a debt management plan. Closing old accounts or reworking your debt can change your debt-asset ratio, which is a credit score factor. But your score should recover pretty quickly and gradually improve over time. Your credit score can take a more significant hit with debt settlement and bankruptcy, but credit counseling and a DMP won't hurt your credit long-term.

Choosing the right approach

So, what's the best way to manage your debt? It depends on your financial situation. Before you pick a method, take an honest look at your finances, from how much you make to what you owe and what you want to achieve in the long run.

If you can handle your debt payments but can't seem to make a dent in your balances, debt consolidation or credit counseling — with or without a DMP — might be a good solution. But if you have fallen behind on payments or your debt has grown to a significant amount you can no longer handle, you may need to consider debt settlement or bankruptcy. If you seek professional help, research debt management companies carefully to find a reputable provider.

Greenlight® Infinity can help you confidently navigate money and life as you travel toward debt freedom. With family location sharing¹, real-time driving reports, and more, and the banking app's² financial features, you can track your family's money and safety. Get Greenlight Infinity today, the money and safety app for families.

FAQs about debt management

If you still have debt management questions, we have answers to some common ones.

What is the meaning of debt management?

Debt management refers to strategies and programs that help you manage your debt more effectively. It may include negotiating with creditors for lower interest rates or longer repayment terms and consolidating debts to create a workable plan that you can pay off over a specific time frame.

How does debt management work?

With debt management, you work with a company, often a credit counseling agency, to combine all your debts into one monthly payment that fits your budget. The company negotiates with your creditors for lower interest rates or to drop fees. You can also create a debt management plan yourself and deal directly with creditors.

Does using debt management hurt your credit?

Using debt management may temporarily lower your credit score if you close or restructure accounts.

What is the responsibility of debt management?

If you work with a debt management company, both you and the company have a role to play. The company negotiates with your creditors and helps you organize your payments in a workable plan. You must make your payments on time and stick to the plan.

¹Requires mobile data or a WiFi connection, and access to sensory and motion data from cell phone to utilize safety features including family location sharing and driving alerts and reports. Messaging and data rates and other terms may apply.

²Greenlight is a financial technology company, not a bank. The Greenlight app facilitates banking services through Community Federal Savings Bank (CFSB), Member FDIC.