The Difference between Credit
Counseling and Debt Consolidation
What is the difference between credit counseling
and debt consolidation?
Debt consolidation as defined by dictionary.com: "The
action of combining several loans or liabilities into
one loan. Put another way, debt consolidation is the
process of taking out a new loan to pay off a number
of other debts causing bad credit. Most people who consolidate
their debt are usually doing it to attain a lower interest
rate, or the simplicity of a single loan. This is also
known as a 'consolidation loan'."
This is what many people do to get their debt under
control. Getting a loan to pay off your debt has its
benefits. You can get all your cards paid off and have
only one bill to worry about every month as opposed
to having ten, twenty, or more bills every month. Many
times collateral is used to back up this loan. If you
own your home or vehicle and the value of these equals
or exceeds the value of the loan you are asking for,
then the bank will usually accept these as collateral.
This means that if you are late, they take it. Some
banks have grace periods or a time period that allows
you to be late without any consequences, but you need
to be sure of this before you sign anything.
Credit counseling is a whole different thing. Credit
counseling is done by an individual, company, or firm
that collects your information and advises you on how
to fix mistakes or black marks on your file. Black marks
are accounts that are thirty days late or later. Common
mistakes that can be on your credit file can range from
a misspelling of your name, wrong social security number,
or any number of mistakes. They will dispute and fix
any mistakes and work with you on removing black marks.
Black marks are fixed by making the account that is
"black" current. They do this by negotiating
a lower interest rate and reduced fees with the creditor.
Then they work with you to get that account paid down
so that is current or paid off. They can do this with
one account or with all the accounts on your file.
Weather you use a debt consolidation loan or a credit
counselor to take care of your credit, you will be helping
your credit score by taking care of it. Banks will see
that you are trying to eliminate your debt and that
will look favorably on you if you apply for credit anywhere.
Both services usually post to the credit bureau every
30 days, but be prepared for it not to appear on your
file for up to six months later. Sometimes it gets delayed,
but don't worry, if you keep at it, you will get out
of debt, or at least get your debt to a manageable level.
Even if you don't pay off all your debt, if you at least
get it where you can afford to make the payments every
month, it will start to reflect positively on your credit
report. This increases your credit score and that's
always good.
