The premise of a debt management company is attractive enough; it effectively buys more time for people in debt, through delaying bill payments or renegotiating payment terms. This stalls the legal actions of the creditors that are owed money. But are they really as good as they sound? Using a debt management company is like joining a slimming club to help you lose weight – it can work but it’ll cost you. Also, not all of them are entirely honest. Many (though by no means all) of these companies are legitimate but they charge you for something that you could, and should, get for free.
Debt managers can take much of the stress and burden off your shoulders and some people think it’s worth paying just for that. But remember, the more money you pay them, the less you have to pay your creditors so the longer it will take to pay the debt and the more expensive it will be in the end.
Debt management companies approach creditors on the customer’s behalf to negotiate better terms for repayment. They typically help you consolidate debts to one payment each month (which is spread across your creditors). They then negotiate with creditors on your behalf to try and reduce repayments and freeze interest.
A debt management company should really be your last option once you’ve exhausted all other avenues – including friends and family or one of the free debt advisory services.
It can be a good way of minimising financial damage, but only if your debt can be paid off over a short period of time. For example:
These plans also consolidate all your outgoings, possibly to more than one creditor, into one monthly payment. Debt consolidation makes it easier to track and stay on top of your expenditure.
The financial help comes at a hefty price – money education charity Credit Action told us these companies typically charge a fee of 17.5% of your monthly repayments, at a minimum of £30 per month and often administration costs or set-up fees to boot.
A debt management company’s admin fees will take up a huge proportion of your overall spending. This can add one year to the time it takes to pay off the debt.
These fees mean that less of your money is actually going towards paying off the debt, meaning the whole process will take much longer than it otherwise would have. The time until you become debt-free will obviously increase again if you use a fee-charging company and have further expenditure.
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Interestingly, it is only since the 1990s that there have been companies that charge for their work; before this debt management was strictly not-for-profit.
Debt management companies that sell products – such as loans and remortgages – on behalf of other obscure lenders, should be avoided at all costs. Handing over your money to anyone instead of creditors really defeats the purpose of working with them.
Put the phone down on any company that says they don’t charge you for their service. They do, it’s just hidden in the payments you are making to your creditors.
If you are at wits’ end, make sure you pick a company that is genuine. There are a number of choices run as charities – some with support from the credit card industry.
Make sure they tell you exactly how much they charge you per month for sorting out your debts and get a second opinion before signing for any products or schemes.
Never hand over bank or other details which could give the company or any third party access to your money, and only go with a company that is registered with the FSA (Financial Services Authority) and has been around for a few years.
If you do choose a private debt management company, make sure you follow the guidelines of the Debt Managers Standards Association. Here are a few options:
AllAboutMoney have a good reputation for providing clear, upfront and honest debt advice and management. They take 15% of your agreed monthly repayment amount as commission. While this is obviously still a cost, it’s less than most other debt management companies.
In return for your money, you will be provided with your own Personal Finance Manager (who acts as a single point of contact for all your debt concerns). He or she will do all the negotiating with your creditors so you don’t have to, and create a personalised repayment plan for you to follow. In short, you’re paying for their expertise in both managing debt and dealing with creditors.
Another useful website is Confused Debt – the UK’s first debt management comparison website. Here, you can choose a variety of debt management companies and compare them by debt solutions, costs and savings, in order to find the most suitable solution to their debt situation.
Although things have improved with the introduction of the Debt Managers Standards Association and the OFT, there are still companies in the industry who will give poor financial advice to consumers. “Debt management companies have cleaned-up their act a bit but there are still a few rogue companies offering bad advice,” says Frances Walker from Credit Action.
If you are going to use a debt management company, never pay an up-front fee and always check that the company conforms to the Office of Fair Trading guidelines. You can check out the companies and websites on the OFT consumer credit register.
There is no guarantee that your creditors will accept the debt management proposal; they may refuse reducing payments or freezing the extra interest. You could be paying to use a service that was never going to work.
Creditors are still free to take legal proceeding against you at any time.
Your credit rating will go down because it will show details of a debt management plan. This may reduce your chances of being approved for credit in the future.
Find out what’s on your credit record with Checkmyfile, Equifax and Experian and see how you can clean up your credit record in our guide here.
Get free debt help
A much better alternative is to use charities that offer free advice and help you to organise a debt management plan:
Make sure you’ve got the best deals on everything from your credit cards to your food shopping. The best 0% purchase card on the market at the moment is the Halifax All in One Card which gives you 15 months 0% interest on purchases and balance transfers (0.8% handling fee applies). The regular rate of interest is 17.9% APR. If you are accepted at the highest rate of 25.9% APR variable you may not be offered an introductory period on balance transfers and purchases.
The longest 0% balance transfer deal is currently Barclaycard’s Platinum card (29 months at 0% with a fee of 2.79%).