Credit Counseling v. Debt Consolidation

People often use the terms “debt consolidation” and “credit counseling” interchangeably, but really they are two very different concepts that result in very different outcomes for consumers. Credit counseling refers to a specific type of debt relief program, while debt consolidation encompasses a much wider range of activities.

Credit Counseling

Individuals may seek credit counseling if they need assistance in managing their debt and with financial planning. A reputable credit counselor not only should help clients with their immediate financial concerns, but also should take the time to educate and offer advice about money management. Counselors certified by the National Foundation for Credit Counseling generally are reputable sources to whom individuals can turn.

While enrolled in a credit counseling program, individuals remain largely in control of their finances and should not have to sign a contract with the counselor. However, even non-profit credit counseling organizations usually will require sign-up and/or monthly fees for their services.

After the counselor has taken the time to consider an individual’s unique situation, he or she should be able to offer the client a variety of alternatives to becoming debt-free. Any counselor who pushes a specific course of action may not have clients’ best interests in mind.

Most commonly and effectively, credit counselors work with their clients to come up with realistic payment plans to pay-off debts. The counselor then proposes the plan to one’s creditors, who may or may not accept the offer. Usually the debt amounts themselves are not negotiated, but sometimes creditors will provide some type of discount or will waive interest fees.

The entire credit counseling process takes quite a while – often about five years – but that is because the debts will be repaid nearly in full. Your enrollment in a counseling program may be listed on your credit report, but your score itself generally should not be damaged. Rather, it may stay at a bit of a standstill until your debts have been repaid, at which time it will rise.

Credit counseling can be a great option for individuals who have difficulty managing their bills.

More about Credit Counseling.

45 Questions to ask a Credit Counselor.

Debt Consolidation

In the broadest sense, “debt consolidation” is a term that is used to describe a variety of options available for debt relief, and may include credit counseling, debt consolidation loans and other financial products. In the narrowest sense, it refers literally to combining many debts into one. When individuals compare debt consolidation to credit counseling however, they probably are referring to debt consolidation companies.

Debt consolidation companies may be said to offer debt settlement, debt management plans, debt negotiation or debt repayment, but they all work essentially the same way. While any reputable company will inform you of other options outside of such services and some may provide you with some “counseling” as well, debt consolidation companies generally are much more narrowly focused than are credit counselors.

Individuals may seek out debt consolidation because cannot afford to pay all of their bills and they wish to avoid bankruptcy. Clients have less flexibility after enrollment with a debt consolidation company than with a credit counselor, and the program often necessitates that they give up some control of their finances to eventually find financial relief.

After a debt consolidation agent considers your financial situation, he or she will contact your creditors to negotiate your debts. Because you are unable to pay in full, your agent will work with creditors to “settle” your debt for a full payment that is less than the full amount of your liability.

It may seem unlikely that creditors would agree to this, but in actuality it is quite common; your creditors do not want you to file bankruptcy because then they likely would receive none of the money owed to them.

Upon enrollment with a debt consolidation company, your credit almost definitely will become worse before it eventually gets better. A debt management plan requires that you cease making monthly payments so that your money can accumulate in a specified settlement account. Once the account has grown to the amount required by a creditor, then that creditor is paid off and the process continues with other debts.

Debt consolidation usually takes less time to accomplish than does credit counseling. It is important to remember that creditors still may take legal action against you despite your enrollment, and the status of the accounts that you let fall behind may be listed on your credit reports for up to seven years.

Enrollment with a debt consolidation company can be a good alternative for those individuals who are trying to avoid bankruptcy, but it is imperative to make sure that the company you choose is reputable. Whether companies claim to be non-profit, Christian or otherwise, always check with the Better Business Bureau to make sure that the debt consolidation company you are considering is worthy of your business and trust.