Debt Consolidation Versus Credit Counseling: Choose Your Best Option

You've heard about credit counseling, and your credit card company urges you to "consolidate debt with a balance transfer" every month. Which should you choose? Credit counseling versus debt consolidation depends on how much you owe, your credit scores and whether or not you have enough credit to roll all of your accounts into one loan or credit card balance. If your cards are maxed and you've missed a payment a couple of times, credit counseling that includes a debt management plan could be your best option.

Debt Consolidation: Roll Several Payments into a Single Payment

Whether you use a credit card to transfer balances to one account or take out a debt consolidation loan, you can simplify bill paying by rolling several account balances into one new account. Credit card companies typically offer balance transfers with a low or no interest rate for a specific introductory period. You may save on balance transfers if you can pay off the full amount during the introductory period, but balance transfers typically include a transfer fee for each balance you transfer, and card issuers typically do not allow balance transfers from any cards issued by their own companies. Balance transfers provide a great way to clean up multiple credit card balances, but if you need major funding for debt consolidation, a personal loan or debt consolidation loan can be a good choice.

A debt consolidation loan is typically made for a specific amount with a fixed interest rate and payments for a specific period of months or years. How much you can borrow depends on your credit scores and reports, income, and employment status. If you have good credit, a personal loan can help clean up credit card balances, medical bills and other expenses that add to your bill-paying chores.

Another option for consolidating debt is a personal line of credit. This option provides a predetermined maximum credit line, but you can draw against it as needed. You are only charged interest on the amount you use. Additional fees may apply, and personal credit lines typically have variable interest rates. It's important to be sure you understand how and when an adjustable rate can change.

Mortgage Refinance, Home Equity Loans and Lines of Credit

If you own a home and have enough equity, you might want to consider refinancing your mortgage for enough cash out to pay off all of your bills. Refinancing requires replacing your old mortgage with a new home loan and requires payment of closing costs. Home equity loans and lines of credit can also be used for debt consolidation and they generally cost less than refinancing your mortgage. You can draw on a home equity line as funds are needed or apply for a home equity loan for a specific amount to pay off all of your creditors at once.

The Federal Trade Commission advises homeowners that borrowing against home equity for debt consolidation involves risks. If you fail to repay on a refinanced mortgage, home equity loan or home equity line of credit, you could lose your home to foreclosure. If you're inclined to spend beyond your means, you could end up owing more on home loans along with more debt. If you have problems with budgeting and overspending, a professional credit counseling agency may be able to help restructure your budget and arrange a debt repayment plan with lower interest rates and payments.

Credit Counseling versus Debt Consolidation: Kick the Debt Habit for Good

It's no fun to be neck-deep in debt with your finances managing your life instead of you managing your finances. Credit counseling services provide help with establishing a cash-based household budget. After reviewing your income and expenses, credit counselors can contact your creditors to arrange an affordable repayment plan. In some cases, you may pay less interest or fees may be waived by creditors to help you pay off your debt faster. Here are things to know about credit counseling agencies in general. Policies may vary, so if one credit counseling service can't meet your needs, continue shopping until you find the right credit counseling program according to your needs.

  • Not all credit counseling services are nonprofit. Fees for credit counseling are established by each agency. Nonprofit credit counseling services may or may not charge less than for-profit agencies.
  • HUD-approved housing counselors can also help with credit counseling. If you're having problems making mortgage payments, a HUD-approved housing counselor can help you work out a repayment plan or other option with your mortgage company; they can also help with budgeting and debt repayment plans.
  • Do not confuse debt management with debt settlement. Debt management programs are administered by credit counseling companies who work with your creditors to make affordable repayment arrangements. Debt settlement programs typically require you to stop making payments to creditors while a debt settlement agent negotiates a settlement agreement on your behalf. There are no guarantees that creditors will agree to a debt settlement offer, and FICO advises that the longer you don't make payments, the worse the damage to your credit scores.

Whether your're looking for a debt consolidation loan, home equity loan or a credit counseling service, it pays to shop and compare lenders and credit counseling agencies. A professional financial planner can help you find your best option based on your circumstances.

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