Life after the DMP

There's a dearth of material online advising consumers about life after a Debt Management Plan. That's not a terrible thing; the fact is, living on a DMP for 2-5 years teaches you a lot about personal money management. There's not a lot educators like me can add that will top the experience of living without access to credit for the duration of a plan.

Still, I think we should try to sum up some of the things DMP graduates can expect.

First, there's your credit rating. If you had a history of making late payments going into your DMP, you may have some damage to your score that you may need to work on. The DMP itself will have no effect on your score, so if your payment history prior to credit counseling was solid, you'll now find yourself with a high credit score and without any debt.

That can be a dangerous thing. If you're fresh out of a DMP, your credit score is good, and your debts are paid off, there can be a great temptation to run out and get a new card and max it out. Don't think that you should buy yourself some big-ticket item on credit as a reward for completing your DMP. Your reward is having no debt, period. If you've spent years diligently working to pay down your debts, spend a few more months working to save for the next big purchase you need to make.

That's not to say you should use no credit- it's important to have one credit card and use it responsibly. Just for the sake of your credit, get a low-limit card and use it regularly, making sure you pay it off every month. I usually suggest using the card for gas and nothing else. Then you have a regular history of using your card with out running up so much debt in one month that you can't afford to pay it all off.

If your credit was wrecked going into the DMP, it's not likely to have gotten much better (though it certainly will not have gotten any worse). If you don't qualify for a credit card, save up enough money for a secured card. You won't need more than $500 for this purpose, and then you can get a $250 secured card. Talk to your credit union or bank about their secured credit card products.

Another thing I would ask any DMP graduate to consider is to "stay on the DMP." That is, continue to live on the same tight budget (you survived for the years you were on the plan, right?), and continue to gather your DMP payment. Except instead of sending that DMP payment toward your debts, start putting it toward your retirement. I think this is a crucial thing that credit counselors don't stress enough. When I write about needing to get out of the financial failure business and into the financial success business, that's what I mean. The typical DMP payment would roughly add up to the allowable IRA contribution limit over the course of a year. In addition to building retirement savings, you get a tax advantage that you didn't get when making DMP payments. If your total DMP payments added up to more than $4,000 per year (or whatever your IRA contribution limit is), then you'll have a little bit extra for other expenses.

If you did have a high DMP payment and you have more than the allowable IRA contribution limit, consider using some of that money to make an extra house payment. And if you're not a homeowner yet, then that should be your next savings goal. Save that extra money toward a large down payment.

Whatever you do, don't take the money you were sending to your creditors every month and waste it. Consider a 529 plan for your kids' education, or some other worthy goal. Going on a DMP and working to become debt free was a smart move. When your DMP is complete, don't suddenly get stupid.

Comments

[Topher]

Our reward for finishing our DMP is a n extra pile of cash we're not throwing at credit cards every month. We're going to nail our car payment, and have a BIGGER pile of cash every month. Start in on the home equity payment, etc etc etc. Every bill we pay off makes the others go away faster. That feels really good.

[Get Out of Debt Squirrel]

The lessons learned from a DMP can be extremely valuable, if you are ready to observe and learn. For many that are not ready, actually for the majority, a DMP fails because the pain of sacrifice is too intense. A chronic mistake people make afterwards is avoiding credit. Without new, good credit, you can't improve your score. Credit in moderation, like cheesecake, is good and OK.

[Paul Volder]

I agree that DMP can be extremely valuable. The budgeting and money management skills are the key to making good decsions after DMP (as long as you have the discipline). What I find still lacking from DMP is getting folks to understand the fundamental principle of Opportunity Cost. Until they know and understand the true costs and impacts of their decisions, they are at risk of slipping ... or suddenly getting stupid. Not knowing opportunity cost breeds a false sense of financial optimism.
(Unfortunately, I see it daily)

Paul
Your-Debt-Consolidation-Loan.com Solutions for a Debt Free Life

[Kirk]

Keeping a couple of credit cards and using them for groceries and gas and paying them off every month is good for mainting and building your credit. After 6 months of no use, your credit card with a zero balance can go inactive to the bureaus, and then you can actually see your score go down. Credit payment history is 10-15% of your score. Letting the credit card hit $0 and not using it again can hurt you. So gas up the tank or go get your groceries and maintain or build your score.
And as the article points out, getting out of debt is essential, but so is working on your retirement next. It's critical if you want to retire and not have to continue working.

[April]

A DMP can be very valuable. Self control is definately a big part of any DMP. Once a DMP program is completed your credit can be re-built with any exsisting car loans or a mortgage payments. With the right DMP you can even learn how to get these kinds of loans paid off early.