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Credit Counseling and Debt Consolidation—What’s the Difference?

When you’re in debt, one of the main things you want to do is get out of it. But the number of options for assistance can seem overwhelming. You can choose credit counseling, debt consolidation, or debt management. Some companies even promise to settle your debt for you, although the Federal Trade Commission warns that some debt settlement programs are scams that can create even more problems for you financially. Understanding the difference between counseling and consolidation can help you get on the path to a debt-free life.

Counseling Comes in Many Forms

When it comes to credit counseling, there is no one-size-fits-all solution. Counseling can take several forms. You can meet with a certified counselor whose goal is to help you put together a budget. You can also meet with a counselor who helps you put together a plan to get out of debt or who guides you through the process of creating a debt management plan.

Typically, credit counseling takes a big-picture look at your financial health. Your debt might be a focal point of your counseling sessions, but it will most likely not be the only thing you and your counselor will discuss. In fact, it is usually a red flag if the only area of your financial life a credit counselor wants to focus on is your debt. During counseling, you shouldn’t feel pressured into consolidating your debt or enrolling in a debt management plant.

Debt Consolidation Options

During credit counseling, your counselor might recommend a form of debt consolidation to help you get your financial life in order. Like counseling, debt consolidation can take several forms. You can do it yourself by applying for a single large loan, then using the proceeds of that loan to pay off your other debts. You’ll then make regular payments on the consolidation loan until it is paid off. Usually, the benefit of taking out one big loan to pay off your other debts is that you have just one single monthly payment and that the larger loan often comes at a smaller interest rate.

You can also work with a counselor to create a debt management plan. Working with a counselor can be particularly useful, as he might be able to negotiate a lower interest rate for you than you’d get on your own or get the company you owe to waive certain fees. Typically, when you work with a nonprofit credit counseling company, you make the monthly payment to the counselor, who then pays the companies you owe.

If you’re struggling with debt, you don’t have to necessarily choose between counseling or consolidation. For many people, counseling leads to debt consolidation or a debt management plan. You can decide to consolidate your debts without speaking with a counselor, but then you miss out on all the advice a certified counselor can provide, such as how to budget your money to avoid falling into debt in the future or how to set and reach specific financial goals.

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