Key takeaways
- Both options repay your full balance with one monthly payment.
- A consolidation loan needs good enough credit to get a lower rate. A debt management plan doesn’t.
- In a debt management plan, a nonprofit agency pays your creditors, who may lower your interest rates.
- Plans usually close the enrolled cards. A loan leaves your cards open, which can be a risk.
- If you’re unsure, a nonprofit credit counselor can compare both with you.
If you’re paying several credit cards and the interest is keeping you stuck, two common options can simplify things without settling for less: a debt management plan through a nonprofit credit counselor, and a debt consolidation loan from a lender. Both mean one payment and repaying in full. The differences come down to credit, cost and discipline.
Side by side
| Debt management plan | Consolidation loan | |
|---|---|---|
| Who arranges it | A nonprofit credit counseling agency | A bank, credit union or online lender |
| Needs good credit? | No | Usually, to get a rate that helps |
| How interest is lowered | Creditors may agree to reduced rates | The loan has its own, hopefully lower, rate |
| Typical length | Often 48 months or more | The loan term, often a few years |
| Costs | Usually a setup fee and monthly fee | Possible origination fee; interest on the loan |
| Your credit cards | Usually closed or frozen | Stay open |
| Credit impact | Usually mild with on-time payments | Small dip from the application, then can help |
The table is based on guidance from the FTC and the CFPB.
How a debt management plan works
You make one monthly payment to the counseling agency, and it pays your creditors. The agency often arranges lower interest rates or waived fees, though that isn’t guaranteed. The FTC says plans require regular, on-time payments and can take 48 months or more. Read how a debt management plan works.
How a consolidation loan works
You borrow one loan and use it to pay off your cards, then repay the loan in fixed payments. It helps if the loan’s rate is lower than your cards’ rates. The CFPB warns that a lower payment over a longer time can cost more overall. Read debt consolidation loans: how they work.
How to choose
A debt management plan may fit better if:
- Your credit isn’t good enough for a lower-rate loan.
- You want structure and someone else handling the payments.
- You’re comfortable closing your cards while you pay down debt.
A consolidation loan may fit better if:
- You have good enough credit to get a rate clearly lower than your cards.
- You’re confident you won’t run the cards back up.
- You’d rather not pay ongoing agency fees.
Neither may fit if you can’t afford one payment that covers your full debt. Then a counselor may talk through settlement or bankruptcy; see debt settlement vs. bankruptcy.
Watch out for
- “Consolidation” ads from settlement companies. The CFPB warns many companies advertising consolidation are actually debt settlement companies that charge fees. A real consolidation loan comes from a lender, and a real debt management plan comes from a credit counseling agency.
- Upfront fees before any service. See 7 signs a debt relief company is a scam.
- Home equity loans used to consolidate, which put your home at risk. See using home equity to pay off credit cards.
The bottom line
Both options help you repay what you owe with one payment. A debt management plan works without good credit and adds structure. A consolidation loan works best when your credit gets you a clearly lower rate and you can keep the cards paid off. A nonprofit credit counselor through the NFCC can help you compare both, often for free. See credit counseling: what it is and how to find a good counselor.
Sources: FTC: how to get out of debt · CFPB: consolidating credit card debt · CFPB: what is credit counseling