When you’re carrying a debt nightmare around with you, debt management companies seem like the answer to all your problems. They offer to take the burden off your shoulders and carry it for you: they promise they have the skills and expertise to keep your creditors happy, while cutting your monthly payments dramatically. It’s all we can do in our exhausted state to avoid weeping with joy as we hand our burden on.
But we shouldn’t be too hasty, because there’s every chance that all they will do is make the burden that little bit heavier, and then hand it back. Debt management companies are not free, and they will not be able to reduce your debts for you. In essence they simply do something that you can get elsewhere for nothing – and then add their fees to your debt burden.
- What do they do?
- When should you use one?
- The pitfalls
- Picking a company
- What else do I need to know?
- What can I do instead?
Debt management companies bring together all your debts, so instead of paying lots of different companies, you make one monthly payment. This psychologically feels less stressful because you don’t have lots of different debts – just one big one.
Typically, they then approach everyone you owe money to, and try to negotiate better terms for your repayments. They will ask creditors to freeze the interest and give you more time to pay the money back.
Up to this point, the service is essentially the same as a debt management plan from a free debt advisory service or a charity.
The way in which they differ, is that in addition to this, debt management companies will add significant fees onto your total debts, so that part of your monthly payment goes into paying the company every month.
Using a debt management company is better than failing to deal with the problem entirely. If you miss your payments, you’ll face penalties, and if your bank account runs dry, you’ll be hit with charges and fees.You’ll have the double-whammy of interest and penalties inflating the total amount you owe every month.
It also brings your debts together into one monthly payment, which makes it easier to keep on top of.
However, it’s far from the only solution, and it’s definitely not the best one.
It’s perfectly possible to negotiate with people you owe money to on your own. If that feels overwhelming, a debt charity can help put together a debt management plan and negotiate on your behalf. It’s also worth talking to friends and family – who may be able to offer moral and practical support.
Debt management company services come with a hefty price tag. Money education charity Credit Action told us these companies typically charge a fee of 17.5% of your monthly repayments – with a minimum of £30 per month. There are often administration costs or set-up fees too.
A debt management company’s fees will take up a huge proportion of your overall debt repayments, and can add a year to the time it takes to pay off the debt.
if you’re going to pick a debt management company
You need to understand what you are getting into. Your first question should be exactly how much they charge each month.
Next, you need to be clear whether the company is negotiating with creditors and bringing payments together – or just selling you a consolidation loan or mortgage on behalf of other obscure lenders. The latter should be avoided at all costs, as you will be paying two sets of charges and fees for a loan from a company you are not familiar with.
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 with a good reputation, which is registered with the FSA (Financial Services Authority). They should also have signed up to the guidelines of the Debt Managers Standards Association.
Although things have improved with the introduction of the Debt Managers Standards Association and the OFT, there are still some bad eggs in the industry. “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.
When you use a debt management company, you also need to know that there is no guarantee that your creditors will accept the debt management proposal; they may refuse to reduce payments or freeze the extra interest. You could be paying to use a service that was never going to work. Creditors are also still free to take legal proceeding against you at any time.
It’s also important to understand that 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:
- Citizens Advice Bureaux (CAB) provide free, confidential and independent advice from thousands of locations in the UK
- StepChange is a debt charity offering an online debt remedy service and free debt advice in person or on the phone.
- Creditaction.org.uk is a national money education charity
- Christians Against Poverty is a national, free debt advice service that runs through local churches.
- Nationaldebtline.co.uk is a website offering a guide to dealing with debt – and has some useful sample letters for writing to creditors.
- Payplan.com is a free debt management company funded by the credit industry, which makes repayment arrangements
- Adviceuk.org.uk is the largest support network for free, independent advice centres in the UK
Money Magpie also has lots of free information which will help you organise your finances and start making a dent in those debts. Learn how to detox your finances and read our guide to beating your credit card balance.