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Credit Counseling vs. debt consolidation
Credit
counseling and debt
consolidation are often confused. People who are in debt but
don’t necessarily understand debt usually end up thinking they
want to consolidate their debt if they cant pay their bills. Or
people who believe the can pay their debt but want a smaller payment
think they need credit counseling or debt management.
Lets break down the difference so you can make
a wise choice and avoid some dangerous money and credit pitfalls.
Credit counseling
First off, you must be employed or have a steady income to enter
a debt management plan. No sense in setting up new monthly payments
if you cant pay.
Credit counseling also referred to as Debt
management is a program that is used to help people avoid financial
devastation and a probable bankruptcy. When your debt exceeds what
your income is (debt ratio), you can quickly spin into free fall
and become upside down. Once that happens, its next to impossible
to swim up to the top. Credit counseling is easily offered by a
non profit debt counseling company such as CareOne.
These types of programs will take your existing
debts and restructure your payments and interest by setting up a
payback program with your creditors. The positive to this type of
program is that you can avoid lawsuits and going into collections
because the debt counseling company will work directly with your
creditors for you. The debt management or credit counseling plan
will take into consideration all your debts and your monthly income
and create a new affordable budget for you. You then pay a set amount
each month to the debt management company and they disburse funds
to all of your creditors.
Do I pay the credit counseling company?
No. If it’s a good solid non profit plan such as CareOne,
you are never asked to pay them. They receive contributions from
the creditors. The reason a creditor will pay these contributions
is because the debt counseling program is helping the creditor to
avoid a total loss, so its good business for creditors to contribute
to these types of plans. If it weren’t for them, you’d
probably go screeching straight to a bankruptcy attorney and the
creditor would get zip!
How long does it take?
That depends on how much you can afford. Since the program is based
on your current income and expenses, that amount can change if your
income decreases or increases or once you begin owing less debt.
The debt management plan is flexible and can be structured according
to your personal budget and bills.
Usually, you can be in a debt management plan
for 12-36 months and break out of the debt and start fresh. The
other great thing about debt management is that they educate you
along the way so that you don’t repeat this mistake again.
What debts can I include?
Debt counseling also know as credit counseling easily covers unsecured
debts. Things like credit cards, medical bills, cell phone debts,
lines of credit. Anything that is unsecured. Secured debt like a
car, house or boat cannot be included because they must be paid
according to their equity and if you were to stretch the payments
out by paying less, then the equity would eventually lose all its
value.
What does happen however, is that the new structured
debt on the unsecured bills you owe, will begin to free up other
funds in your budget so that you can pay those secured bills.
What about my credit?
You have to consider this. If you are considering a credit counseling
program then obviously you cant pay all your bills. Most likely,
you’ve already began falling behind in your payments and that
is being reported to your credit reports. When you start a debt
management plan, the counselor will work with your credit to either
freeze or reduce the interest and lower the payments.
This new contract will be approved and the creditor
will begin accepting these new payments as “current and accepted”.
All the prior late payments will still be on your credit but once
you are out of debt and able to be free of the massive debt load,
then you can begin to work on restoring your credit. It’s really
a matter of worrying about your credit later, if you are already
in serious debt trouble. The existing bills and a plan to tackle
those takes precedent. A
bankruptcy would kill your credit as would charge offs, repossessions
and judgments so this is
a good alternative.
Debt Consolidation
Many people confuse these terms and in actuality it can mean two
different things. What you need to look for is the program terms.
Are you looking to reduce your monthly payments because in you’re
in financial trouble or are you looking
to lower your overall debt and have one payment, one rate.
Debt consolidation can either be, consolidating
all your debt into a debt management plan such as described above
or consolidating all of your debt into a new
LOAN. That’s the key here. A new loan means you probably
still have good credit but you realize you are paying way too much
when you add all your loans up, especially considering their separate
interest rates.
In this case, a new loan may be the type of program
perfect for you. You may want to consolidate 5-6 credit card payments
into one with one
payment, one rate. It simplifies everything and can save you
a ton of cash!
Some debt management programs also call their
debt relief plans, consolidation because you are consolidating your
bills into a new plan so be sure you know which type of consolidation
you are talking about.
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