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Debt Consolidation vs. Credit Counseling

by adam on July 19, 2012

America’s economy is as bad as at any time in the past 50 years. Millions of American families are struggling with debt. According to one recent study, the average credit card debt per household is nearly $16,000 and the average household debt is $54.000. You’ve started to look for solutions to your debt problems. You may have read about debt consolidation, credit counseling and debt management. Let us take a closer look at your options.

If you’re hip deep in debt

Are you having trouble paying your bills? Are you being threatened by your creditors or harassed by collection agencies? Are you afraid you’ll lose your home or your car?  You’re not alone. Thousands of American families are in the same fix and desperately searching for help.

Consumer credit counseling

One way to cope with debt is through a consumer credit counseling agency. These agencies are generally non-profits and often provide their services free. The way they work is that you are assigned a credit counselor who will go over all your finances and help you develop a plan for paying off your debts, usually within five years. The counselor will negotiate with your creditors to reduce your interest rates, and to consolidate all your unsecured debts into one monthly payment. This is commonly called a debt management plan or DMP.credit counseling

The negatives of credit counseling

Before you rush down to your nearest consumer credit counseling agency or go online to find one, you need to know some important facts. One of the most important of these is what I wrote in the last paragraph, “Consolidate all your unsecured debts into one monthly payment.” In other words, credit counseling can’t do anything about your secured debts or those that have been secured by an asset such as your house or you car(s). You will still be responsible for them outside of your debt management plan.

Only approved creditors

Another important negative of credit counseling is that every creditor isn’t always accepted into the program. Many large banks such as Bank of America may not be accepted, which means you’ll have to deal with them separately on your own.

Third, a debt management plan typically requires monthly payment that’s very similar to the total minimum payments you are making now. It may even be a bit higher. For example, if the total minimum monthly payments on your unsecured debt are $1,400, you can just about bet that your consolidated monthly payment will be at least $1,400 and maybe even more. In other words, if your goal is to consolidate your debts into a lower monthly payment, a debt management plan will not get you there.

Credit counseling can hurt your credit score

Despite what some of the credit counseling agencies might want you to believe, this form of debt management will hurt your credit score. This is because all your accounts will be closed and a third party will be handling your debts, i.e., the credit counseling agency. The result of this is that the available credit on your credit cards will go to zero. Since the amount of credit you have available is a major component in the credit-scoring model, this is bound to have a negative effect on your credit score.

How debt settlement is different

Many families have chosen debt settlement (often called debt negotiation) over credit counseling. And there are some good reasons for this.

How debt settlement works

Debt settlement is different from credit counseling in some very important ways.  A credit counseling service will negotiate a payment plan with your creditors but it will still be up to you to make your monthly payments. With debt settlement, you only pay your creditors when you have reached a settlement and deposit the money into a trust account that’s set up by the debt settlement company. The debt settlement company uses most of what you pay into your trust account to pay off your creditors but takes a percentage as compensation for its services. They only get paid after you see results.

stop credit card debt problemsDebt settlement is unique

A debt settlement program can reduce both your debt and your interest rates. This makes debt settlement unique in that it is the only known program that will actually reduce your debts – you could end up paying only a fraction of what you owe. This means your monthly payment will be much lower than the total minimum monthly payments you have now.

Become debt free in just 24 to 48 months

As I noted above, credit counseling/debt management plans can help you become debt free in five years. In contrast, debt settlement can help you pay off all your debt in just 24 to 48 months, again because it has helped cut your debts drastically. It will also stop those harassing phone calls. This is because a debt settlement company such as National Debt Relief will contact all your creditors and let them know it is now representing you so they are to have no further contact with you.

There is a downside

One disadvantage or downside to debt settlement is that it will definitely have an adverse effect on your credit score. If you recall what I said earlier, you need to stop making payments to your creditors for 5 to 6 months. This will be reported to the credit bureaus and will have a negative affect on both your credit reports and credit scores. However, filing for bankruptcy has an even worse effect as it will stay in your credit reports for 7 to 10 years, during which time you may find it very difficult to get any new credit of any kind.

However, once you have settled all your debts you will have no more unsecured debts or loans and your credit score will start to improve because your financial situation has improved as a result.

Hopefully this has helped you distinguish between debt consolidation vs credit counseling.