Credit Counseling is a highly regulated nonprofit service that has a high degree of accountability. Be sure the organization that you’re working with is licensed and regulated organizations, others are not.
These nonprofit organizations should have free financial education programs available for you that are designed to educate you about how you can improve your personal finances. Take them up on their free materials if you feel you could benefit from brushing up on your financial skills.
Credit counseling organizations also offer debt relief programs called Debt Management Plans (DMPs). These plans are designed to help you repay your debt in 60 months (five years) or less. The credit counseling organization typically has a relationship in place with your creditor that helps reduce monthly payments required, and interest rates charged and if the account was delinquent the creditor will typically stop and late or over-the-limit fees. The cards become closed to further charging; however, it allows the consumer to end the spending cycle and repay their debt without the need of declaring bankruptcy. There is a large segment of individuals that find themselves in debt that find a debt management program as a positive solution to their situation.
Again, do your homework, because credit counseling organizations can vary greatly in terms of the quality of services and help provided.
Bottom Line: Be Careful When Getting Help with your Debt! The endgame is to be out of debt and while the promises of quick, easy, and painless debt relief can sound enticing, be sure that it isn’t too good to be true.
If you need help with multiple credit card payments, medical bills, and other unsecured debts, then debt consolidation may sometimes be your best option if you want to protect your credit and avoid bankruptcy.
Debt consolidation takes all of your unsecured debts and combines them into one lower monthly payment. It can be accomplished in two different ways: with a loan or without a loan.
Debt Consolidation with a Loan
There are many organizations that offer loans to people looking to wipe out their debt quickly. These lenders will often offer a favorable interest rate with the promise of getting you out of debt faster than any other method.
However, in many circumstances, your original indebted accounts are never closed. You then are stuck accumulating your original debt while also being responsible for paying off the new consolidation loan. Even worse, occasionally these loans can come attached to something with a collateral value such as your home. Fixing debt with more debt is a high-risk financial decision.
Debt Consolidation without a Loan
Debt Consolidation without a loan is accomplished in an appointment with a Certified Credit Counselor. This appointment can be done in person or over the phone. (It can also sometimes be done via email.)
During this appointment, the Certified Credit Counselor will review your current personal finances such as your household budget, your income, and your expenses, as well as other assets and liabilities. You will determine if there is a benefit to participating in the Debt Consolidation Plan.
Your creditors will then be contacted by the counselor so that arraignments can be made to reduce monthly payment requirements, lower or waive interest rates, and stop late or over-limit fees.
All of the debt is combined, and a new single monthly payment is made. The Debt Consolidation Program will send payments on your behalf to each creditor. Finally, the account is closed to any further charging upon creation in order to avoid extending the repayment terms and building even more debt.
Which One Should You Choose?
Debt consolidation with a loan requires a qualification process. A low credit score or extremely high amount of unsecured debt can decrease your chances of choosing this option. Debt consolidation without a loan takes time and proper money management. Sometimes it may be your best option. Our organization recommends speaking to a certified credit counselor first before choosing either option.
Can Debt Consolidation Hurt Your Credit?
If you choose Debt Consolidation, there is always a chance your credit score will be impacted in some way, especially when starting with a program. Debt Consolidation with a loan could have a smaller initial impact as long as you do not use any further credit cards and accumulate any more debt.
Debt consolidation without a loan will affect your credit score early on because you close your accounts to further usage. Your balance-to-available-limit ratios play a role when calculating your credit score. However, as you pay down your debts through the DMP and its new agreements with your creditors, the positive information on your credit report will most likely improve your credit scores. It’s not surprising to find credit counseling clients with credit scores in the 800+ range at the end of their DMPs.
Does It Cost Money to Consolidate Your Debt?
Yes, and the cost of debt consolidation can sometimes change radically. If you choose a plan that uses a loan, then you may have new interest rates as well monthly payments that could be higher or lower depending on your circumstances.
The fee is usually based on how many accounts or the amount of debt you include in your DMP. However, all fees are capped by country regulators to a reasonable limit. Fees can sometimes be temporarily lowered as well for individuals or households struggling financially.
One last note
Debt consolidation can be a safe alternative in comparison to other courses of action. It can sometimes save your credit and is less risky overall, compared to any type of repayment through debt settlement or especially bankruptcy.
However, one of the biggest risks of debt consolidation comes from the potential for your own mismanagement. Opening new lines of credit and adding to your overall financial burden can crumble any progress debt consolidation brings. Ultimately, Do-It-Yourself is best but can’t always be done.
If You Want to Try the Do-It-Yourself Way
After enough research, you may discover that you can repay your debt on your own. A credit counselor appointment can help with that, often free of charge. It will take discipline to manage a working budget on your own, but by refocusing your expenses you may be able to avoid additional fees of unwanted changes to your credit profile.