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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.

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