Debt can be a tremendous burden, affecting much of your life. Fortunately, there are several viable options to get out of debt. This article will review two options: credit counseling and debt consolidation. Each has its own benefits. Depending on your specific needs, one will probably be better than the other as a debt relief option. Credit counseling can help you get rid of debt as well as provide you with the skills to stay out of debt in the future. Debt consolidation is another feasible debt relief option with a different structure. Here is a breakdown of each method so you can find the best option for you.
Here’s what you need to know about credit counseling vs debt consolidation.
Debt Consolidation & Credit Counseling
Both of these debt management efforts can bring drastic changes to your life. Taking back control of your finances can be incredible! But, how do you know where to start? Before taking any action, start with your research of debt consolidation and credit counseling.
Debt Consolidation
Debt consolidation combines all the unsecured debt into one new consolidation loan. Unsecured debt can include credit cards, medical bills, and personal loans. Consumers make one monthly payment and don’t have to worry about multiple payments and due dates.
Debt consolidation is a viable option if you are struggling to keep up with multiple payments to different creditors. It can help you become more financially organized and pay down debt faster while benefiting from lower interest rates and other advantages.
Every debt relief option has pros and cons. So why do people ask “are debt consolidation loans bad?”. The major point of contention with debt consolidation is whether users qualify for a worthwhile loan. Securing an interest rate lower than your current loans is key to making consolidation an effective debt reduction strategy.
To figure out if debt consolidation loans are for you, it’s important to assess your financial situation. Take into account how much debt you’ve accrued, any damage to your credit score, and whether you’re ready to address the habits that contributed to your debt in the first place. The more honest you are about your debt, the easier it will be to overcome it.
If you have poor credit, it may be difficult to find a lender who will offer the low interest rates that make debt consolidation beneficial. And, like other options, a debt consolidation plan is not the right choice for every consumer.
Credit Counseling
So what is credit counseling? Credit counseling with a non-profit agency, like ACCC, can be a great way to eliminate debt. You will work with a certified credit counselor to evaluate your current finances over the phone. The counseling will lead to actionable steps to get out of debt. Typically, you would enter a debt management program. In some cases, bankruptcy might be recommended. Other times simple tweaks to a budget are recommended. Finally, they will provide educational resources to improve your financial habits.
The counselor will need your income and information on all your debt. Be prepared to answer questions regarding interest rates, balances and more. The agency will work with your creditors to negotiate a new payment plan that fits within your budget. Many times the monthly amount will be reduced as well as the interest rate. Similar to debt consolidation, you only pay the credit counseling agency one monthly payment. They will then distribute the payments to each creditor.
Credit counseling is a great tool for debt relief and future debt prevention. As you look for help with your finances, be sure to choose wisely. Many agencies search for a profit in helping consumers pay off debt.
To protect your interests, here are some things to look for in a credit counseling agency:
- Non-profit organization
- Have been in business for at least 7 years
- Have a state license
- Charge no minimum fees
- Have certified counselors
- Are a member of one of the trade associations: either Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC)
Changing Financial Habits
Once you are on your way out of debt through debt consolidation or credit counseling, it’s time to make some permanent changes to your financial habits. We all come from different backgrounds and levels of financial literacy. However, now is the time to learn from your mistakes.
Take a look at these positive financial habits you can incorporate into your personal finances:
- Use and follow a household budget.
- Eliminate all debt.
- Create SMART goals.
- Work with your partner or spouse planning and managing your finances.
- Track all spending.
- Meal planning and grocery lists can be a tremendous help to avoiding debt and sticking to the budget.
- Focus your budget on needs first, then wants.
- Before making big purchases, try sleeping on it. You may realize you don’t need it!
Additionally, you can take steps to help ensure you won’t land into unforeseen debt in the future:
- Keep a $1,000 emergency fund easily available.
- Save 3-6 months of living expenses to protect against unexpected job loss.
- Make sure your budget includes rollover funds for car maintenance, haircuts, personal gifts and more. Be specific to what your life needs!
- Consider different insurance policies such as: short and long term disability, additional health care items, extra coverage on car insurance, and life insurance.
Conclusion of Debt Consolidation and Credit Counseling
Let’s review what we have covered. Debt consolidation and credit counseling are both very reasonable methods of debt elimination. Debt consolidation takes a new line of credit and pays off all the different creditors. It leaves you with just one loan and one payment. Credit counseling through a non-profit credit counseling agency is part of a debt management program to work with your creditors to pay off debt, often at lower interest rates and lower monthly payments.
While debt consolidation can be a great debt relief method for some, credit counseling has many of the perks of debt consolidation without taking on a new loan. Additionally, it provides resources to create a new budget and boost financial literacy.
Everyone’s finances are unique. Therefore, there is no black and white answer. If your credit is in good standing and you don’t typically struggle with debt, a debt consolidation loan could work well. Consumers with many debts and who struggle to manage their finances would probably benefit more from credit counseling. Review your finances, do some research and make an informed choice. Taking control of your finances is the best way to direct your money to meet your goals.
For more information about getting out of debt, sign up for a free credit counseling session with us today.
