If you are in debt, and want to consider your options, it’s important to know the difference between credit counseling and debt consolidation.
What Is Credit Counseling?
Credit counselors are a bit like financial doctors. They sit down with you and do a thorough physical on your finances. They look at the amounts you owe, all of the different accounts that you owe, and your current budget.
Afterward, they work with you to lower your interest rates, get fees removed on your accounts, and bring everything current.
Then, instead of making many monthly payments to all of your debts, you will pay the credit counseling services a single payment, and they will make the monthly payments to your creditors on your behalf.
Pro’s of Credit Counseling:
If you can find a reputable credit counselor that does what they are supposed to do, it can be quite an advantage. It will take a ton of stress off of you for starters.
Also, licensed credit counselors are adept at renegotiating terms with credit card companies. They may be able to accomplish things like getting your fees removed, interest rates lowered, etc. even when you have had no luck.
If you want to read up on how to choose a legitimate credit counseling agency, you can check out these two articles:
Con’s of Credit Counseling:
There can be quite a few cons to credit counseling, so be careful!
- Some credit counseling is free, others are not. It just depends on which agency you use.
- Credit Counseling Agencies may hold your first month’s payment. It is always easier to negotiate with your creditors when you are past due. Holding your first month’s check means that your credit counseling agency will get to speak with the collections department. Dealing with collections gives them more opportunities to make settlements, get rates lowered, etc. The problem is, going a month behind on all of your payments can really damage your credit score. If you’re in debt up to your eyeballs and really need the help, it may be worth it to you! Just be aware that it happens.
- Some credit counseling agencies require you to close your open credit accounts. This, combined with being a month late can devastate your credit score to the point that it will take years of good credit habits to recover.
- Not all credit counseling agencies are created equal. Be sure that you investigate the agency you want to work with to be sure that they will really act in your best interest. You should also get an upfront schedule of fees.
Overall, credit counseling is an excellent option for anyone who is truly in debt and feels like they have nowhere to turn. If you are considering bankruptcy, or you are unable to get your credit card companies to make a settlement with you, or help you in any way, then this is definitely an option to investigate.
As far as the negatives – yes credit counseling can damage your credit rating. But, you may actually be able to repair your credit rating faster once your debt is paid off by using secured credit cards, or credit building credit cards.
Whatever you need to do to get out of debt or avoid bankruptcy is always going to matter more than your credit score. Your credit score is repairable, not having financial security is a much worse situation to be in!
So, credit counseling is one option, let’s take a quick look at another.
What Is Debt Consolidation?
Debt consolidation is a form of leveraging your debt. It means that you will take out a new loan (usually at a better interest rate) in order to pay off many loans, like all of your credit cards.
Pro’s Of Debt Consolidation:
If you have good credit debt consolidation is an excellent option. Instead of paying variable, or high rates of interest on your credit accounts you will pay one low fixed rate for a new loan in the amount of your total debt.
With debt consolidation you get to make a single monthly payment and you save money on the interest you are charged as well.
If you have a lump sum to pay off your credit card debt (from the consolidation loan) you may be able to negotiate settlements, or fee removals on your credit accounts. Credit card companies are always willing to work with you more easily if you can make a large lump payment at one time.
Con’s of Debt Consolidation:
Debt consolidation is really not an option for people who have bad credit. If you have bad credit, you will have a very difficult time even getting a loan to consolidate your debt. If you do manage to get a loan, the interest rate could be as high (or higher) than what you are paying on your debt to begin with.
Also, there is one big trap to watch out for as far as debt consolidation goes. Do not continue to charge on your credit cards once you have consolidated your debt. If you do, you will end up with twice as much debt as you had before you consolidated.
That sounds simple, but many, many people fall into that trap. If you are considering debt consolidation, it may help to cut your credit cards up for a while. (Do not close the accounts it will lower your credit score.) Once you have your consolidation loan paid back, you can simply call and have new cards sent to you.
Debt consolidation is also an area where scammers and thieves like to prey on people needing help.
All in all, Debt consolidation is an excellent option for people who have good credit scores, no history of late payments, or over the limit charges, and who are disciplined enough to not continue charging on their credit cards until the consolidation loan is paid back. It is a financially intelligent way of paying down debt, but it can be emotionally difficult.
What do you think? What’s the best way to get out of debt? Leave us a comment below!