Credit Counseling vs. Debt Consolidation: What’s the Difference?

Learn the difference between credit counseling and debt consolidation from AmONE. Both credit counseling and debt consolidation are ways to help manage debt.
confused man with bills
Written by:
Adam Beckles
Edited by:
Kristin Marino verified

When exploring credit repair options you’re likely to come across debt consolidation and credit counseling. Both of these options could be a valid solution to your financial problems, but choosing between credit counseling and debt consolidation can lead to some confusion.

Many people are choosing these programs as an alternative to bankruptcy, and knowing the difference between debt consolidation and credit repair can help you decide which path is best to take. The end goal is similar, but how each debt management program works is what makes them unique.

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Credit Counseling

Credit counseling is a highly effective tool for those struggling with debt. It provides individuals with a structured plan to manage their debts and can help them reduce the overall amount owed.

A study conducted by the National Foundation for Credit Counseling (NFCC) found that 75% of individuals who completed a credit counseling program were able to reduce their overall debt load.

The Benefits of Credit Counseling

One of the primary benefits of credit counseling is the personalized support and guidance it provides.

A credit counselor will work with you to analyze your financial situation and create a customized plan that fits your unique needs.

This can include debt consolidation, negotiating with creditors to reduce interest rates, and developing a budget to manage expenses.

Another significant benefit of credit counseling is the potential to improve your credit score.

By working with a credit counselor to develop a debt repayment plan, you can begin to make regular payments on your debts, which can positively impact your credit score over time.

Furthermore, credit counselors can work with credit bureaus to dispute any inaccurate or negative information on your credit report.

Choosing the Right Credit Counseling Agency

Choosing a reputable credit counseling agency is essential to ensure you receive quality service and support.

Look for agencies that are accredited by organizations such as the NFCC or the AICCCA.

These agencies must adhere to strict standards of service and quality, and they can help ensure you receive the support you need to manage your debts effectively.

Debt Consolidation

Debt consolidation is a popular method of managing multiple debts for individuals struggling with high-interest credit cards and other unsecured debts.

This process works by combining all your debts into one loan, typically with a lower interest rate and a more extended repayment period, resulting in a lower monthly payment.

This can help individuals struggling to keep up with multiple payments or looking for a way to simplify their finances.

Collateral Requirements and Credit Score Impact

Some loans for debt consolidation require collateral, such as your home or car, to secure the loan. This means that you could lose your collateral if you don’t make payments on the loan.

When you get a personal loan for debt consolidation, it’s an unsecured loan. This means you won’t have property taken away if you can’t pay.

It’s essential to carefully consider the risk before taking out a debt consolidation loan that uses your home as collateral, such as a home equity line of credit or a cash-out refinance.

Additionally, taking out a new loan could negatively impact your credit score, as it could increase your ratio of debt to available credit.

Average Credit Card Debt and Interest Rates

According to a report by the Federal Reserve, the average credit card debt in the United States was $5,315 as of 2020, with an average interest rate of 16.28%. This high-interest debt can quickly become overwhelming for individuals struggling to make payments, leading many to explore options such as debt consolidation.

Fixed Interest Rates and Negotiated Lower Rates

One potential benefit of debt consolidation is that it can provide a fixed interest rate, which can be lower than the variable rates associated with credit cards and other forms of unsecured debt.

This can make it easier to budget for your monthly payments and can help you pay off your debts faster. Additionally, by consolidating your debts into one loan, you may be able to negotiate lower interest rates and fees, further reducing the overall cost of your debt.

Potential Risks and Downsides

It’s essential to carefully consider the potential risks and downsides of debt consolidation before deciding. This includes the potential impact on your credit score, the potential loss of collateral if you’re unable to make payments, and the potential for additional fees and charges associated with the loan.

Ultimately, choosing between debt consolidation and other debt management options will depend on your circumstances and financial goals.

The Takeaway

Although they serve a similar purpose, debt consolidation and credit counseling work in different ways to help consumers manage debt.

AmONE can help you learn the difference between debt consolidation and credit repair, and determine which option is best for your financial situation. Get connected with credit counseling services or a lender that provides debt consolidation loans.

Contact AmONE today to get your credit counseling and debt consolidation questions answered today.