BALTIMORE — Interest rate hikes are making it harder for consumers with credit card debt to pay off their balances, and with high inflation, many are racking up more debt.
A debt management plan is a lesser-known option than debt consolidation or debt settlement, but it helped Johnika Dreher pay off more than $70,000 in debt and lose over 50 pounds.
Four years ago, the Upper Marlboro woman felt buried in debt with tens of thousands of dollars spread out on 8 different cards.
“We walk into this home that’s so huge, we had to furnish it, our son was 2, all these new things that we have to get, and we just saw things balloon,” said Dreher.
The crushing feeling of this debt became overwhelming, so Dreher talked with her bank who recommended Money Management International (MMI), a nonprofit credit counseling service.
“In a debt management program, the creditors agree to reduce the interest rates to about 6.4 percent and have people on a plan to be out of debt within about 4 years on average,” said Thomas Nitzsche, director of media and brand for Money Management International.
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It’s different from debt consolidation, where you take out a loan to pay off debt and interest rates vary based on your credit, and it’s not debt settlement or bankruptcy, which can damage your credit.
“Because there is such greater awareness around loans that’s typically what most people gravitate towards just because they know it exists, but functionally, a debt management plan is much the same thing where you make one fixed monthly payment. The interest rate is fixed at that reduced lower interest rate and lasts for a maximum of 60 months, but the average client is on it 48 months,” said Nitzsche.
It took Dreher 49 months to pay off all her debt. Her interest rates were reduced to an overall average of 9 percent, negotiated by MMI, saving her an estimated $120,000.
“They take the guesswork out of it and really just tell you – here’s what you owe, we’re going to go behind the scenes, configure a payment plan for you, we’re going to work out all the logistics of letting the providers know that this is what you’re doing,” said Dreher.
As part of the program, Dreher had to give up all of her credit cards and refrain from opening any new lines of credit. MMI also charges set-up and monthly fees
“Their fee is so minimal and it’s built in, I think it was less than $50 a month,” added Dreher.
The sacrifices and discipline yielded lifestyle changes for Dreher, helping her shed weight financially and physically.
“I started the program in early 2017, I think it was February, I was a little over 200 pounds at that time and throughout the discipline, you can’t do a lot of things because you don’t have a lot of money. I started exercising in the house and using YouTube. I dropped 55 pounds by the time I went to my next physical,” said Dreher. “You mentally shift your mind to think about what’s happening, what do I want, what do I value, and I started looking at money a lot differently. When you don’t have it to lean on, you’ve got to lean on some other things, so exercise got me through.”
While the Federal Reserve raised interest rates twice this year, these hikes do not impact agreements creditors have with consumers who go through nonprofit debt management. However, if a customer fails to make a payment, the creditor can drop out of the plan.
Debt management plans only cover unsecured debts such as credit cards and personal loans, not mortgages or student loans.
And you don’t need a credit counseling agency to reduce your interest rates. Call your lender and see if they’re willing to work with you then also speak with a counselor to compare the rate they’re offering.
Consumers should work with nonprofit credit counseling agencies that are accredited by the National Foundation for Credit Counseling (NFCC).
Click here to find a NFCC agency near you.
And click here for additional information on other ways to pay off debt.