Self-Directed Debt Management

Step-by-step directions and other considerations for creating and managing your own Debt Management Plan.

“A pig bought on credit is forever grunting.” –Spanish Proverb

The average American household has more than $8,000 in credit card debt. For some people, credit cards provide an easy way to spend beyond their means. For some others experiencing crisis, a lack of financial planning has made them feel like they had no choice but to turn to their credit cards or other costly forms of credit. It is the charges that follow – high interest rates and fees – which cause many to become overwhelmed. This publication will present steps you can take to address debt trouble.

Warning Signs Of Debt Trouble Debt problems often arise gradually. The earlier you recognize financial difficulty and take preventative actions, the easier it will be to avoid/manage a severe crisis. Here are some signs that typically forecast trouble:

  • Only making the minimum monthly payment.
  • Being late with the payment.
  • Transferring balances from one card to another.
  • Converting short-term financing to long-term.
  • Feeling like you’re living paycheck to paycheck.
  • Having to borrow/charge to cover basic necessities (such as food, utilities).
  • Arguments over money issues.• Having no emergency fund and/or savings.

Set Realistic Goals Being financially secure is a primary long-term goal. This goal will be unattainable, however, without the commitment to spend less than you earn. A critical part of reaching your goal will be to eliminate bad debt. One method for dumping this debt is to create a Debt Management Plan (or DMP). A DMP is a systematic way of maximizing the effectiveness of your monthly payments.

Self-directed DMP Steps

You can create and manage your own DMP, but you should know that it requires much self-discipline. Here are the steps:

1. No Additional Debt Be firm: take on no new debt. Credit cards and loans should be considered taboo. The question now should be “will that be cash, check or debit card?”

2. Know What You Owe Collect your financial documents. Gather all your bills and financial statements. If you can’t find your most recent statements, go online, call, or visit to get a copy. Get a copy of your credit reports and cross check them with your statements. If you find errors, dispute them. For assistance regarding your credit reports, read the publications listed below. If you don’t think a particular debt belongs to you, you can send a letter to the creditor, or collector, to dispute it and request written validation of it. For assistance with this, read the FTC publication on Fair Debt Collection listed below.

3. Make A New Plan Use the financial information you have collected to complete a Spending Plan (budget) in light of your current situation. For assistance with this, read our publication The Spending Plan. A critical part of this process is to prioritize your debts: Priority 1 – mortgage or rent, auto loan, vital utilities, legal obligations (child support,alimony, taxes); Priority 2 – secured debt (such as loans for secondary property/vehicles); Priority 3 – unsecured debt (such as credit cards and medical bills). Another essential part of the process is to find ways to cut your expenses and/or raise your income. For assistance with this, read our publication More With Less. (see publications below)

4. Communicate & Negotiate Contact your creditors without delay. When you call, ask to speak to a manager or supervisor – you need to speak with someone who has the authority to grant your request rather than quote you policy. If you are current on the account, ask for a lower interest rate. If you are behind, briefly explain your situation and that you intend to pay your debts in full, but that you are asking for them to work with you. Ask them to lower your interest rate and/or stop penalty fees. Ask what temporary assistance or hardship programs are available. Some programs may even temporarily reduce or suspend your monthly payment.

5. Use Power Payments The “power payments” strategy is an effective way to eliminate your debt as quickly as you can. First, determine the maximum monthly payment you can manage for all your unsecured debt. Add up your existing monthly minimum payments. If the total of your minimum payments is not less than the maximum monthly payment you can afford,you will need to return to steps 3 and 4. Apply any extra money (after making all the monthly minimum payments) to the account with the highest interest rate. Now, here is the key: when one account is paid off, take the amount you were paying on it and apply it to the remaining account that has the highest interest rate. This method will minimize your finance charges. Alternatively, if you apply the extra to the smallest balance, you will reduce the number of accounts more quickly. Resist the urge to spend the money on other things and continue this compounding of payments until all your debts are paid. Afterwards, keep making that same monthly payment to a savings account until you have an emergency fund of at least $1000. Ideally, continue until you have a savings fund equal to 3 to 6 times your monthly income.

Don’t People “Need” Credit Cards? A credit card is not a necessity. If you know that you tend to keep a balance when you have a card, then its best to not use the card. Its up to you to find a system that will help you do that. Some people cut up the card, other people will store it so that it is not convenient to get (such as putting it in a plastic cup of water kept in the freezer). If you want the convenience of using plastic money, a check (debit) card works quite well. More importantly, because it only accesses your current funds, it helps you live within your means – which is the first step in financial wellness.

Credit Concerns? If you’re concerned about your credit rating, here are some things to consider. Your first concern should be to get rid of your bad debt –your payment history and amounts owed make up 65% of your score. Two to four credit card accounts are more than enough for your credit file. However, even if an account has a bad payment history, it may not help your score to close it (but still pay it off and don’t use it). Score simulation services are available to assist you with specific actions you can take to improve your score (check out or

Some Considerations Regarding Other Assistance

Balance Transfer. It’s possible to score a few points playing this game, but there are several pitfalls. If your available credit will allow you to transfer high interest balances to lower ones, then this can make sense. However, if you get close to your credit limit, one slip up could get you seeing over-limit charges. Additionally, you should know that maxing out your card has a negative effect on your credit score. You should carefully investigate the other terms before making your decision.

Home Equity Loan. Tapping into home equity also has pros and cons. On the upside, you can typically get a much lower interest rate than with credit cards. You can often lower your overall payment. Finally, the interest on the loan might be tax-deductible. On the downside, the first thing to remember is that a home equity loan does not decrease your debt. Many people get a false sense of relief and fall back into old spending habits, eventually running up the credit card balances again. You can end up in worse shape than ever. If you don’t get serious about paying down the debt ahead of schedule, you can end up paying more in the long run, because the payments are spread out over more years. Finally, you’re taking the significant added risk of securing your short-term debt with your house.

Professional DMP. If you find that you cannot manage a self-directed plan, a qualified credit counselor may help you. All organizations which offer DMPs are not created equal, so be careful to utilize a credit counseling agency that is non-profit, accredited, and has a good record with the Better Business Bureau. On the upside, the credit counseling agency can often get you better terms than you can get on your own. They can provide you with program support and financial education. On the downside, you’ll probably pay a monthly fee or a donation. While you’re on the program, credit counseling might be noted on your credit files, and while this isn’t part of your FICO score, required closing of accounts may affect your score negatively at first. For more help, read the FTC publication listed below.

Debt Settlement. A settlement involves negotiating with a creditor on the balance in an attempt to get them to take less than what is owed. As you might expect, there are many pitfalls and so this is seldom a good choice. However, if you are unable to pay a debt that is more than 5 months past due and you think you can manage a lump sum payment, you might consider trying to arrange a settlement. For critical information on settlements, read our publication listed below.

Bankruptcy. If all else fails, bankruptcy is a final option. On the upside, a bankruptcy can eliminate your legal responsibility for some debts and give you a fresh start. On the downside, a bankruptcy will damage your credit and will remain on your credit reports for at least 7 years. Bankruptcy has also become more complicated and more costly. To determine if a bankruptcy is the right solution for you, please consult a competent attorney.For more information on these and other options, contact us by phone or online.

To Find Out More

The Spending Plan (Alliance):

Guide To Surviving Debt (D. Loonin, et al, National Consumer Law Center)

Fiscal Fitness: Choosing A Credit Counselor (FTC):• Dangers Of Debt Settlement (Alliance):

Your Rights in Fair Debt Collection (FTC):