Consolidation vs. Debt Management vs. Credit Counseling
Before we discuss the specifics of credit counseling we should discuss the specific differences between the three most common forms of third-party debt management.
There are several different types of consumer credit services that all claim to be the solution to your debt related problems. There are debt consolidation companies, debt management services and credit counseling, to name the most widely used. While they have a number of things in common, there are some significant differences as well. Let’s take a look at how they compare to one another.
The first type of consumer debt service is debt consolidation. These companies will help you pay off your debts by consolidating several of them into a single loan. This loan generally has a much lower interest rate, particularly compared to credit cards and other types of consumer debt. It may also have a lower monthly payment, which can be a benefit if you are struggling to meet your existing payments.
These consolidation loans are generally secured by some sort of collateral, such as your home or other assets. This can be a disadvantage in some cases. Because they are secured loans, if you are unable to make the payments for some unexpected reason, your home or other assets could be at risk since they are collateral for the loan.
In most cases, credit cards and other higher-interest debts are unsecured, so they would not be able to put a claim against your assets in the same way. This is the biggest downside to converting unsecured debt to secured debt. You’ll also have an extremely hard time getting approved for loan or debt consolidation if you don’t have substantial collateral.
Debt management services generally work with you to create a more manageable financial plan, including budgeting and analyzing your spending habits. They will also negotiate with your creditors on your behalf, to arrange lower interest rates, have service fees and other charges waived and possibly even lower the balance owed (uncommon but it happens).
Working with these debt management companies can negatively affect your credit rating, so it’s still something you need to think carefully about. But because they are not re-financing your debt so much as re-negotiating what already exists, there is less risk for your home and other assets.
Credit counseling has many similarities to debt management programs, but its main focus is to help you get your own finances under control. This not only includes getting control of your debt and the monthly payments, but also improving your overall financial habits so you become more effective at managing your money. This will help you avoid getting back into debt once you have it paid off. As far as this book is concerned we will be discussing debt management and credit counseling interchangeably because most companies that offer one of those services will also offer the other and many will even use those terms interchangeably. The most strikingly different method is consolidation which, as you read, is a bit more risky than counseling and debt management.
Credit Counseling and Debt Management
Possibly the most confusing thing for most people is determining what a credit counseling agency will actually do for them. One thing to remember is that most of these companies are not non-profit organizations (There are some but the general trend is for-profit). They are businesses that need to make money and generally speaking that money will come from you, the client.
Credit counseling (known in the United Kingdom as debt counseling) is a process that involves offering education to consumers about how to avoid incurring debts that cannot be repaid through establishing an effective Debt Management Plan and Budget. Credit counseling is usually less typified by functions of credit education or the psychology of spending habits, rather credit counseling establishes a planned method of debt relief, typically through a Debt Management Plan. Credit counseling often involves negotiating with creditors to establish a debt management plan (DMP) for a consumer. A DMP may help the debtor repay his or her debt by working out a repayment plan with the creditor. DMPs, set up by credit counselors, usually offer reduced payments, fees and interest rates to the client. Credit counselors refer to the terms dictated by the creditors to determine payments or interest reductions offered to consumers in a debt management plan.
Okay so that was the cut-dry, dictionary definition of a credit counseling service (AKA debt settlement service). Let’s go into a little more detail. Credit counseling services have the potential to be an extremely effective and reliable solution to clearing any type of debt. For this, a credit counseling professional will try to understand your present financial condition. This will help him to select an appropriate plan for you. With this plan, you will be able to take control over your financial matters. Though the option of credit counseling is easily available but you will have to face certain problems in using them.
Debt settlement companies are also very famous among the people because these companies can enable you to reduce your liabilities by negotiating with your creditors on your behalf. This option is reliable and many people are using it to get rid of their financial liabilities. You can also choose the debt consolidation program as it is easily available in the market. With the help of this plan, you will be able to pay the monthly debt repayment easily, if you don’t have any multiple loan amounts. You can take complete advantage from these options and plans for resolving your financial difficulties. You can use the debt settlement plan for getting rid of your liabilities as it is one of the best suitable options.
