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Credit Counseling vs. Debt Consolidation: How They Work And Differ

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Credit counseling is when you work one-on-one with a financial professional who can help you better manage your debt and negotiate with creditors on your behalf to potentially secure more favorable repayment terms. Debt consolidation, meanwhile, is when you take out a new loan or credit card you use to combine multiple existing debts, ideally with more favorable repayment terms.

In this article, we’ll compare credit counseling versus debt consolidation. By taking a deeper look at how each process works, you can decide if either financial strategy could work well for you.

Credit counseling

What is credit counseling?

Credit counseling, sometimes called debt counseling, is the process of working with a certified credit counselor to help you overcome financial challenges, such as those related to overwhelming debt or budgeting. Your counselor may be able to advise or educate you about your money, credit and debt; set up a budget for you; enroll you in a debt management plan; or help you explore bankruptcy.

Credit counseling may be best known for their debt management plans. You can enroll unsecured debts, such as credit cards, to consolidate monthly bills and get help with paying off your debt within three to five years. Your counselor can also speak on your behalf to potentially lower interest rates, monthly payments and reduce fees, as well as help stop debt collection calls.

If you’re behind on your bills, overwhelmed by debt or contemplating bankruptcy, working with a reputable counselor may be worthwhile.

How does credit counseling work?

When you choose a credit counseling agency to work with (more on that below), you’ll schedule an initial credit counseling session, which is often free. This session may take place in person, over the phone or online.

Before meeting with your credit counselor, gather recent pay stubs, bills, credit card and bank statements. It’s also helpful to list out all of your monthly expenses, especially variable spending like utility bills, food and gas.

During your meeting, your counselor will review your finances and speak with you to better understand your needs and challenges. If you choose to enroll in services, your counselor may:

  • Walk you through the process of setting up a personal budget, often via a customizable worksheet.
  • Suggest a debt management plan to help you lower or stop interest, consolidate select monthly bills and repay enrolled unsecured debts within three to five years.
  • Offer student loan counseling to help you identify your available options (repayment plans, forgiveness, etc.).
  • Provide you with educational materials or access to workshops on various financial topics, such as bankruptcy, money management and using credit responsibly.

Some recommendations may come with additional costs and steps you’ll need to complete. Actual fees can vary widely per organization.

Where can you find a credit counselor?

You can find credit counselors at nonprofit organizations and for-profit businesses, but the majority of reputable credit counseling companies are nonprofit. Both types may charge a setup fee plus a monthly fee depending on your debt and location if you enroll in services. Always ask a credit counselor about its fee structure upfront, as they can vary among organizations.

If you’re unsure where to begin your search, one of the following organizations can help you locate a trustworthy credit counselor in your area:

Below are several nonprofit credit counseling organizations approved by the Justice Department and the common fees they charge for comparison purposes.

Comparing credit counseling fees
Organization Fees
American Consumer Credit Counseling Initial credit counseling session: Free
Debt management plan:

  • $39 Enrollment fee
  • $5 Monthly maintenance fee

Bankruptcy counseling:

  • $49 Pre-filing online counseling
  • $39 Post-bankruptcy online counseling
Debt Management Credit Counseling Corp. Budget counseling: Free
Debt management plan:

  • $50-$100 Set-up fee
  • Monthly fee – not disclosed

Bankruptcy counseling:

  • $30 Pre-discharge debtor education
  • $25 Post-bankruptcy debtor education
GreenPath Financial Wellness Initial credit counseling session: Free
Debt management plan:

  • Up to $50 set-up fee
  • Up to $75 monthly fee

Bankruptcy counseling:

  • $50 Online or phone counseling
  • $50 Online or phone education
InCharge Debt Solutions Initial credit counseling session: Free
Debt management plan:

  • $75 Set-up fee
  • $33 Average monthly fee

Bankruptcy counseling:

  • $25 Pre-filing online credit counseling
  • $15 Pre-discharge online debtor education

Fees are accurate as of July 16, 2020

Is credit counseling bad?

Working with a credit counselor isn’t bad, but it’s not right for everyone. Debt management plans won’t work for most secured debts and services may cost between $25 to $50 per month or more, unless you qualify for a fee waiver. Other services, such as for bankruptcy counseling, can come with their own fees.

Credit counseling doesn’t directly impact your credit. But a debt management plan may affect your credit in other ways. For example, a credit counselor may require you to close credit cards enrolled in the plan. Those account closures might trigger an increase in your credit utilization ratio and, by extension, a potential credit score drop. (Credit utilization describes the percentage of your credit card limits in use, according to your credit report.)

Debt consolidation

What is debt consolidation?

Debt consolidation is the process of taking out a new loan or line of credit and using it to pay off old debts. Debt consolidation can have several benefits:

  • Lower repayment costs: If the new debt has a lower APR and/or shorter repayment term, you can decrease your overall borrowing costs.
  • Lower monthly payments: A lower interest rate could lead to lower monthly payments. Balance transfer credit cards, for example, may come with a promotional APR for a year or longer. With a loan, you might also choose a longer repayment term to reduce payments in exchange for a higher overall cost of borrowing.
  • Reduce the number of bills you juggle.

Debt consolidation is often done with a debt consolidation loan or balance transfer credit card, though secured loans are also an option. (“Debt consolidation loan” often refers to an unsecured personal loan.)

Where can you find debt consolidation products?

Most banks, credit unions and online lenders offer products you can use to consolidate debt, such as:

There are pros and cons to each option. For instance, personal loans are unsecured, meaning your credit is more heavily weighed when determining eligibility. Lenders often reserve the lowest APRs for borrowers with strong finances and high credit scores, as well. On the other hand, a home equity loan could offer great rates to borrowers with value in their home – but they require you back the loan with your home. If you default on a home equity loan, your home could be at risk for foreclosure.

What does the debt consolidation process look like?

  • Research lenders and/or creditors who may offer you competitive terms. You can explore LendingTree’s credit card marketplace or fill out a simple form to potentially see debt consolidation loan offers. In either case, you may be able to prequalify with creditors to see terms you may qualify for when you formally apply. Prequalification only requires basic information such as your name, address, Social Security number and income.
  • Compare your options. Ideally, you should prequalify with several lenders or credit cards so you can compare your options. Consider factors such as APRs, repayment terms, borrowing limits and fee structures.
  • Submit a formal application. You’ll submit to a hard credit check, which will ding your credit. Creditors will also review factors like your debt-to-income (DTI) ratio and may request supporting documentation like pay stubs.
  • Wait for approval. You may receive an answer as soon as the day you apply. But certain creditors may take several business days to respond. If your application is denied, ask the creditor why. You could then take steps to improve your chances of later being approved for credit.
  • Use the new line of credit or loan to consolidate debt. After you qualify for a loan, your lender may pay off your existing debts directly or you may need to apply your loan proceeds toward your original accounts. With a credit card, you’ll complete a balance transfer, which can come with a 3% to 5% balance transfer fee.
  • Begin repayment. With your old debt paid off, you’ll begin making payments on your new line of credit or loan. If you paid off credit cards, you can choose to close the accounts or keep them open.
Tip: It’s wise to review your credit scores and reports before you fill out any official financing applications to avoid surprises, like credit reporting errors, and to get an idea of the current condition of your credit.

Is debt consolidation bad?

Debt consolidation isn’t bad. In fact, the approach can work well for certain people. One major advantage of debt consolidation is the fact that, when managed responsibly, it might help you improve your credit scores, especially if you’re paying off old credit card balances and lowering your credit utilization ratio.

On the other hand, a poorly managed debt consolidation can backfire. It’s dangerous to pay off your existing credit cards, for example, if you’d struggle to avoid racking up additional credit card debt. In that case, you may need to address underlying financial issues before pursuing consolidation.

Credit counseling vs. debt consolidation: Which is right for you?

Your specific financial situation determines whether credit counseling or debt consolidation is the better fit. Yet it’s better to take action sooner rather than later if you’re searching for debt relief.

Credit counseling could be best for you if …

  • You prefer to work with a professional instead of working toward financial goals alone.
  • It’s difficult to afford your monthly debt payments and financial obligations.
  • You’re overwhelmed trying to juggle multiple accounts and monthly payments.
  • You want to understand your finances better but don’t know where to start.

Debt consolidation could be best for you if …

  • You can afford your monthly payments but you’re paying high fees on your current debt.
  • You want to reduce the number of bills you pay each month.
  • You have good credit and/or are comfortable with secured debt and can qualify for new financing with more favorable repayment terms.
  • Potentially improving your credit score is important to you.

In general, credit counseling and debt consolidation are financial strategies that most people don’t combine together. However, if you have unsecured accounts (perhaps credit cards) that you don’t want to close and include in a debt management plan, a separate debt consolidation loan might be beneficial.


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