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Debt Management vs. Debt Consolidation: Which is Better?

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Danielle Greving author image
Danielle Greving
Dec. 28, 20225 min read
Is your debt out of control? Are you wondering what you can do to get a better handle on it?

Coming out from under your debt can feel like an uphill battle. However, there are strategies for handling debt that make life easier. Two of the most common ways to handle debt are through debt management and debt consolidation. Both of these strategies can help you pay off debt more quickly and save you money. But which strategy is better?

Read this guide on debt management vs. debt consolidation to find out.

What Is Debt Management?

Debt management, often known as a debt management plan, is an approach that involves working with a credit counseling agency to create a plan to help you eliminate your debt. We recommend working with a credit counseling agency that has been approved by the US Department of Justice.

With a debt management plan, your credit card debts will be rolled into one single monthly payment with a lowered interest rate. The repayment term usually lasts three to five years, and during this time, you can’t use credit cards or open any new lines of credit.

Debt management plans usually focus on tackling credit card debt only, as opposed to student loans, personal loans, or medical bills.

Who is debt management best for?

Debt management is best for those who primarily need to pay off credit card debt and have more debt than they can reasonably consolidate. It’s also a great option for those whose credit score doesn’t qualify them for a debt consolidation product, such as a debt consolidation loan or balance transfer.

It can also help those who need enforced discipline to stop spending on their credit accounts. If you’re interested in debt management, you can contact a nonprofit credit counseling agency to get started.

What Is Debt Consolidation?

Often referred to as a debt consolidation loan, this type of debt relief consolidates several of your high-interest debts, often from credit cards. It enables you to make a single monthly payment, ideally with a lower interest rate.

There are a few ways to go about consolidating your debt, including taking out a home equity loan, a balance transfer credit card, a 401(k) loan, or a personal loan. Keep in mind that you’ll need a good-excellent credit score to qualify for a balance transfer credit card or personal loan.

Who is debt consolidation best for?

Debt consolidation is best for those who are looking to qualify for a lower interest rate than what they currently pay, and cut the number of payments they have to deal with.

It’s also a great option for those who want to maintain access to credit while paying off debt.

Debt Management vs. Debt Consolidation: What Are the Differences?

Debt Management vs. Debt Consolidation: What Are the Differences?

The goal of debt management and debt consolidation is the same—to regain control of debt and save money. However, debt management and debt consolidation employ different tactics for paying down debt.

You can go about debt consolidation on your own, which requires opening a new account, be it a personal loan or a new line of credit. Or you can follow a debt management plan, created with the help of a credit counselor.

The repayment terms differ for each strategy, too. With debt consolidation, you need to make regular monthly installment payments toward your new loan. For example, if you open a balance transfer card, you’ll choose how much you want to pay each month, as long as it’s at or above the minimum required payment amount.

If you qualify for a balance transfer card with 0% interest for the introductory period, you may want to try to pay off your debt before the promotional period ends and the interest rate goes up.

On the other hand, a debt management plan doesn’t involve taking out a new loan. Rather, it’s a helpful service offered by nonprofit organizations at a low cost. Instead of paying money toward your credit cards, your monthly payments will go toward the credit counseling agency.

Typically, the credit counseling agency will make your monthly payments on your behalf, and you’ll only be responsible for sending a single monthly payment to the agency. However, in some cases, the agency will help you draft a repayment plan, and you’ll be responsible for making all your monthly payments.

Debt Management vs. Debt Consolidation: Requirements

One of the great things about a debt management plan is that there are no specific requirements you need to meet to qualify. However, debt consolidation comes with several requirements, including:

  • Proof of income: The lender will want to ensure you’re financially stable enough to take on a new loan.
  • Credit history: The lender will use your credit score to determine your interest rate and look into your payment history.
  • Equity: If you take out a large loan, the lender may require you to put down collateral, such as home equity, to avoid financial risk.

Debt Management vs. Debt Consolidation: Interest Rates

The way interest rates are set also differs between debt management plans and debt consolidation loans. As mentioned, your credit score is not a factor in whether you qualify for a debt management plan.

Instead, your credit counseling agency will work with a creditor to determine an interest rate based on your ability to pay. If you’re considered a hardship case (with a credit score below 550), you may qualify for an interest rate as low as 0%-6%. But in most cases, you can expect to pay an interest rate of around 8% for a debt management plan.

With a debt consolidation loan, your creditor will rely heavily on your credit score to determine your interest rate. If you have a credit score of 650 or higher, you can expect an interest rate of around 8% (maybe even lower). If your credit score is below 650, your interest rate may jump into double digits. Credit scores below 580 will seldom be considered for a debt consolidation loan.

Debt Management vs. Debt Consolidation: Fees

Debt management program fees are necessary for the nonprofit agency to keep running. While these agencies are nonprofits, they still need to generate enough income to pay their employees, manage their office spaces, and buy equipment.

Debt management fees are based on the state laws where you reside. Generally speaking, though, you can expect to pay between $20 and $55 in monthly fees. Some agencies also charge a one-time set-up fee of around $75, although this can vary by state.

Instead of varying from state to state, debt consolidation fees vary from lender to lender. Most lenders will charge an origination fee, which usually amounts to 1%-8% of your monthly payment. Other potential fees may include late payment fees (generally $15-$30), insufficient fund fees (generally $15), and check processing fees (generally $7).

Debt Management vs. Debt Consolidation: Effects on Credit

Debt management programs require you to stop using all but one credit card. Halting payments on your credit cards can temporarily cause your credit score to drop. However, as you begin to pay down your debts, your credit score will eventually improve.

With debt consolidation, you add another line of credit, which can negatively impact your credit score. However, if you stick to on-time payments for a minimum of six months, you’ll see your credit score improve eventually.

Debt Management: Pros and Cons

Before signing up for a debt management program, keep in mind the main pros and cons:

Pros of Debt ManagementCons of Debt Management 
  • No minimum credit score required to qualify
  • Receive the help of an agency to develop an affordable monthly payment plan and budget based on your current income 
  • Consolidate debt without taking out another loan or opening up a new line of credit
  • Receive financial tools and education from your credit counselor that can help you prevent future financial troubles
  • Cancel your commitment at anytime 
  • Receive reduced interest rates, resulting in significant savings over time
  • Make only one payment each month
  • Overdue accounts are still considered eligible for your plan
  • It can’t be used for debt outside of credit cards (e.g. student loans, medical bills, or tax obligations)
  • It generally takes three to five years to pay off debt
  • You can’t open new credit cards or lines of credit during this time
  • Missing a payment could void your reduced interest rates
  • Associated fees can increase your debt 

Debt Consolidation: Pros and Cons

Here are the pros and cons of debt consolidation to keep in mind:

Pros of Debt ConsolidationCons of Debt Consolidation
  • Receive lower interest rates compared to what you’re currently getting
  • You still have access to credit cards while repaying the loan
  • Consolidate debt into one monthly payment
  • Receive necessary funds to pay off creditors
  • You need to have a certain credit score to qualify for lower interest rates
  • Associated fees can increase your debt
  • You need to pay creditors and manage your debt on your own
  • Failure to make payments can result in late fees

Debt Management vs. Debt Consolidation: Conclusion

Deciding between debt management and debt consolidation really comes down to your personal needs. If you feel you need help managing your debt and don’t mind shutting down your credit cards, then a debt management plan may be right for you.

However, if you would still like the option to access your credit cards and believe you could qualify for a low-interest rate due to your credit score, then debt consolidation may be right for you.

Either way, both options are excellent solutions for paying down debt and getting back on track financially.

Danielle Greving author image
Written byDanielle Greving

Danielle is a tech and finance writer with experience in personal finance, cryptocurrency and numerous SaaS companies. Her bylines can be found on MoneyTips, CoinMarketCap, GraniteShares and Top10.com. An avid traveler and former ESL teacher, Danielle's writing blends a wealth of technical and financial knowledge with simple and straightforward explanations for everyday readers.

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