What is 'Credit Consolidation'? Your Guide to Credit Counseling

Credit consolidation, more commonly known as credit counseling, is a process by which counselors help debtors to find debt relief and to plan for their financial futures. Not to be confused with debt management, true credit counseling aims to offer clients education and financial skills in addition to help with their immediate troubles.

Credit counseling, along with debt management and other alternatives, is one form of “debt consolidation”, a term that - in its broadest sense - has come to encompass a wide range of debt relief actions. Credit counseling is among the most popular of these options.

If you are finding it difficult to come up with your own plan to get out of debt, or are feeling overwhelmed or lost, then credit counseling is a great idea. When you meet with your counselor, he or she should take the time to really understand your unique financial situation, as well as your worries and financial goals.

It is your counselor’s job to come up with the best solution to your problems, and to give you different options from which to choose. You should avoid working with someone who pressures you into a “one-size-fits-all” solution like a debt management plan, because such an alternative may or may not be your ideal course of action.

Nonetheless, the most common outcome is the development of a repayment plan that will work for your finances. Your counselor may contact your creditors to negotiate waiving interest and other fees, but your actual debt load most likely will remain the same. You and your counselor then will come up with a realistic plan, the payment obligations of which you must be able to meet. Your creditors do not have to agree to this plan, but often will because they want their money.

Your counselor should not just stop working with you after the creation of your plan, however. The largest thing that separates credit counselors from debt consolidation companies is that the former is interested not only in fixing your immediate problem but also in preventing future problems.

There is a very fine line nowadays between credit counselors and debt consolidation companies. Many credit counselors act more like debt consolidators, and many debt consolidators claim to be “non-profit” to appear more like credit counselors. It is imperative that you research any company or organization in which you are interested to make sure that you are getting the services that you need, and to make sure that they are legitimate and affordable.

Working with a debt consolidation company may be a better choice than credit counseling for those in severe debt who cannot realistically pay their bills. A debt management plan from a debt consolidation company strives to lower actual debt loads through negotiation, and is a good alternative to filing bankruptcy.

Credit counseling, on the other hand, is best for individuals who may be financially strained or in need of simplified finances, but who do have the ability to repay most debts.

A Word to the Wise

Whether or not any credit counseling organization is a good match for you is something that can be discovered only through careful consideration and comparison. There are many great credit counselors, but there also are people who are out only to take advantage of your distress. It is very wise to check accreditations, to consult the Better Business Bureau, and to know what to ask potential counselors before enrolling.

You may be interested in a non-profit credit counseling organization, and while there are many very good non-profits, you must understand that such a label does not necessary mean that services are cheap or affordable. Be sure to compare fees with other organizations anyway. Worst case scenario, a company could be calling itself “non-profit” just to win your business.

Remember the age old wisdom about things that seem to good to be true…. no one can legally “eliminate” your debt. Ignore those emails, and dismiss any calls that you receive out of the blue. Such offers never are your best option.

Credit Scores

Your participation in a credit counseling program might be listed on your credit reports, but it should not affect your score. Some creditors, however, may be weary to lend to you during this period, so your score potentially could stay at a standstill until completion of your program.

Once you reliably make payments and eventually pay off your debts through your credit counseling program, however, your score will improve. The entire process can take a few years, but you will have gotten out of debt without heavily damaging your finances and credit.