Debt Consolidation vs. Credit Counseling: Understanding the Difference
Entering the world of debt management can be confusing and intimidating. Make sure that you do your research so your debt management strategies lead to real debt solutions.
AFS offers consumer credit counseling services that empower our clients to make the right financial decisions and gain control of their finances. Over time, our clients dramatically improve their financial situation by reducing debt and improving their credit scores over time. We do this without high interest debt consolidation loans, which can lead to more financial trouble.
Debt consolidation means taking out a loan to consolidate all of your unsecured debts into one. Generally this is either a home equity loan or a high interest debt consolidation loan. With a home equity loan, you are using your home’s valuable equity to pay off unsecured debt, stretching out the repayment of the debt and putting your home at risk if you are ever unable to make the payment. A debt consolidation loan is usually a signature loan given by a financial institution which may make your life easier for a while as you will only have one payment, however the higher interest rates on such loans will have you paying more for your debt over time and there are no creditor concessions attached to such a loan.
In direct contrast our credit counselors will listen to your needs and work with you to develop the best course of action for your unique situation and help you pick the best solution to manage your debt.
AFS in-depth credit counseling and financial education courses will help you develop better ways to manage your debt payments. Some customers will find that our free financial education courses (available via our website) and the information provided in our credit counseling session’s gives them all the information they need to better manage their finances.
If appropriate for your situation, our credit counselors can also help you set up a Debt Management Plan (which is available for a modest fee each month) that will consolidate your debt payments into one convenient monthly payment. When you enroll on a Debt Management Plan, your creditors will generally lower your current interest rates, waive or reduce fees and in many cases bring your accounts into a current standing after you have made three consecutive, on time payments.. When you stick to the Debt Management Plan, your credit rating will rise as your debts are paid off and your financial peace of mind is restored.
Finding the Right Debt Solutions — Consumer Credit Counseling Can Help
If you are in over your head with credit cards and other debts, you may be having a difficult time trying to decide what debt solutions are available and which are appropriate for your situation. Working with a consumer credit counselor can help you identify debt solutions that may work for you and then help you put choose the best debt solution to enable you to take control of your financial situation.
One of the debt solutions you may want to investigate is a Debt Management Plan which is a structured repayment plan of your current debts. Creditors will typically extend the following benefits when you enroll in a Debt Management Plan: lower interest rates, reduction or elimination of fees and, a consolidation of your payments into just one each month. Because of the payment consolidation, many consumers perceive debt management and debt consolidation to be the same thing when they are in reality, quite different. A Debt Management Plan is not a debt consolidation loan. A debt consolidation loan is typically not recommended as a good debt solution as the interest rates on such loans are generally high and the only real benefit is that by consolidating your debt, you only have one payment each month. For more information on debt consolidation, please read the article about the differences between Debt Consolidation and Credit Counseling on our homepage.
Another, so called, debt solution that you may have heard of is Debt Settlement. There are many debt settlement companies who promise to reduce your debt by 50% or more. They use provocative advertising, telemarketing and charge extremely high up-front fees. Recently, the Federal Trade Commission announced a new rule to protect consumers from predatory practices of the Debt Settlement Industry.
The new rule covers the following provisions:
- For profit debt relief companies that sell products over the phone may not charge a fee before settling a debt for a consumer
- Debt relief companies will be required to make specific disclosures to consumers
- Debt Relief companies will be prohibited from making misrepresentations
- The Telemarketing Sales Rule will be extended to cover calls consumers make to these firms in response to debt relief advertising.
This is excellent news for consumers who have been at the mercy of these companies who make false promises, fail to disclose what will happen when the consumer stops paying their debts, as instructed, and pockets hundreds or thousands of the consumerŐs dollars in fees before ever settling a debt.
We recommend you avoid these companies and if you do wish to find out more information about settling a debt, go directly to your creditor. If you have questions regarding this, please contact a certified consumer credit counselor who will be happy to explain this to you in more detail.
One of the biggest factors in finding a debt solution that works for you is going to be in putting together a solid monthly budget. No debt solution will work if you cannot afford to make your payments each month. If you choose a Debt Management Plan as your debt solution, your credit counselor will stress that not making your payments once a debt management plan is in place can leave you in a worse situation than when you started. The benefits extended by creditors to enrollees of the debt management plan can be cancelled very quickly if consistent, on time payments are not received each month. A certified credit counselor can assist you in preparing your budget and give you tips on how to spend wisely and save money.
Before you make a decision that can affect your financial future, speak with a credit counselor at American Financial Solutions about your financial situation and find out about the best debt solutions available to you. You can start an online application or call and speak with a certified consumer credit counselor immediately.
