Taking control of your debt is quite a challenging task. However, there are proven ways through which you can manage your debt efficiently. In order to clear your debt faster, you need to check on all options that are available and choose one that suits your financial condition the most. There are a number of ways through which you can become debt-free and take control of your finances. Two of the several options you could consider include – debt consolidation and credit counselling. So are these two options one and the same? Or do they differ? Let’s take a quick look at how these two options can help you manage your finances better.
What Does the Word “Debt Consolidation” Mean?
In simple words, debt consolidation is an option through which you can transfer your pending balances from several accounts into a single new account. With debt consolidation, you’ll have to make only one payment on a monthly basis versus multiple payments on various debts.
Credit Counseling: Let’s Define it for You
When you register for credit counselling, you will work along with an individual (credit counsellor) who will help you manage your debt. A credit counsellor will not just assess your debt alone but he/she will also will take a look at your assets, income, and your other financial commitments.
What Else You Need to Know About Debt Consolidation
When you intend to consolidate your debt, you have two options to choose from. One is through a personal loan or via a credit card.
Credit card balance transfer
When you want to consolidate balances from several credit cards, you can consider using a credit card balance transfer option. However, when you need funds of a higher value for debt consolidation, you can opt for a personal loan (debt consolidation loan). Most credit cards offer you either 0% or a low-interest rate for a fixed promotional period on the balance transfer option. When you use balance transfer, you’ll get the chance to become debt-free without incurring any interest rate charges. A few credit cards will charge you a balance transfer fee while a few cards do not charge any fee for the initial period. In case you fail to repay your debt within the promotional period, you'll end up paying the standard interest rate charged on the card for the remaining outstanding amount. You can also consider transferring the outstanding balance to another card so that you can use the promotional period on that card to pay your debt without paying any interest. However, continuously switching balance transfer facilities to enjoy promotional interest rates might affect your credit score and lenders could be under the impression that you are unable to manage your debt efficiently.
Personal loan (Debt consolidation loan)
When you opt for a personal loan to consolidate your debt, you’ll be given a specific loan amount based on your income, credit score, credit report, and employment status. You’ll have to repay the loan amount within a fixed tenure and at a fixed interest rate. This works like any personal loan.
What to consider when you opt for debt consolidation
Consider opting for debt consolidation only when you have a good credit score. This is because, in case you have a bad credit score, you might still be successful in getting a loan, however, chances are high that you will be charged a higher interest rate versus the interest rate that is applicable on your existing loans. Once you’ve made a decision to go ahead with debt consolidation, it is recommended that you stop using your credit cards as far as possible unless and until you’re done with repaying your debt consolidation loan. This is because, if you continue to use your credit cards while making your loan repayments, you’ll only end up increasing your debt and thus the purpose of you taking up a debt consolidation loan fails altogether.
What Happens When You Opt for Credit Counseling
Firstly, a credit counsellor will assess your current debt situation. Also, apart from your debt, you’ll need to share information about your financial income, assets, and other expenses you carry out, with your credit counsellor. Post a thorough review of your financial status, a credit counsellor will recommend you with a solution to help you in clearing your debt faster. You can expect financial solutions such as a debt management plan, budgeting, a debt settlement, or a debt consolidation. Sometimes a credit counsellor might also recommend bankruptcy if your financial situations demand it.
How can a Credit Counsellor Help You
- By providing you with financial advice on how to manage your funds and debts better.
- You can seek the counsellor’s help to create a budget for yourself.
- You can request the counsellor to provide you with a credit score or a credit report.
- A few counsellors will provide you with complimentary workshops and free study materials.
- A counsellor will assess your financial situation and provide you with a plan to clear your debts faster.
Credit Counseling or Debt Consolidation – What Makes Them Different?
When you opt for credit counselling, your credit counsellor will negotiate a repayment amount and an interest rate that is lower. Also note, negotiation will be done only to lower your monthly repayment amount and not the money you owe to the creditor. You will not repay to your creditors directly, you will make a payment on a monthly basis to your credit counsellor who in turn will pay your creditors. In debt consolidation, you’ll be given a loan amount using which you will clear your pending debts, and repay the loan amount in fixed monthly instalments directly to the financial institution that granted your loan.
In a debt consolidation, your monthly repayment amount will be calculated based on your loan amount and interest rate. However, with credit counselling it is slightly different. Your credit counsellor will negotiate with your creditors and will come up with a monthly payment after considering your overall financial situation (expenses, income, assets, etc.). Hence a monthly payment that comes with credit counselling may be more affordable in comparison to debt consolidation, where the rates are fixed for anyone seeking this option and will not take into consideration your current financial predicament.
The responsibility of making repayments
In credit counselling, as mentioned earlier, your repayment will be made to the counsellor and not to the creditor directly. In case your counsellor defaults on making a repayment to your creditor, you’ll be liable to pay a late payment fee even though you were not at fault for missing the payment. With a debt consolidation loan, it is on you to make timely payments on your loan and not dependant on any third party.
When you use the credit counselling option, it will be recorded on your credit report. Unless and until you’ve cleared all your debts in full, you will not be able to get an additional loan. However, when you opt for a debt consolidation loan, you’ll have access to additional credit if you are eligible, whether or not your loan is still active. Also, in case you don’t manage your additional credit in the right way, you might end up with more debt in comparison to what your debt was previously.
Points to Consider Before Choosing a Credit Counsellor
What kind of services you can expect
- Before finalising, you need to be aware of the kind of services you’ll be getting and the fees you’ll be charged. Consider opting for a credit counselling agency that assists you with a wide range of services – such as debt management classes, budget counselling sessions, etc.
What is the mode through which counselling will be provided?
- Credit counselling organisations will provide you with counselling via phone, online portal, or in-person.
What are the fees and charges you’re liable to pay?
- Check for the fees and charges you’ll be charged for your counselling sessions. At the time of enrollment itself, ensure that the credit counselling company gives you in writing the fees you’ll have to pay and the services they are extending to you for the charged fees.
Other generic things you need to consider:
- Check on the qualification of the credit counsellor you intend to choose.
- Check if the agency is accredited, certified, or licensed.
- Check if there are any reviews pertaining to the credit counsellor you want to opt for.
- Find out if the credit counsellor or the agency you’re considering to opt for has sufficient experience in the financial industry.
- Check if they offer any complimentary study materials.
- Check if the credit counsellor has received any professional certifications or training with respect to finance.
Your decision to go either for a debt consolidation loan or for credit counselling will depend on how much debt you have to clear. When you think you have sufficient funds to clear your debt but want to pay off your debt at lower interest rates, considering a debt consolidation loan will be a suitable option for you. Also, with debt consolidation you need not make multiple payments, you need to make a single payment on a monthly basis and manage a single account versus multiple accounts. However, if you’re finding it hard to clear your debt on time, you might want to consider credit counselling. When you opt for credit counselling, you will qualify for many other services apart from counselling alone. Always make sure you do the right amount of research that is required before you sign up for any kind of financial service, solution, or a loan. Don’t miss out on asking questions so that you’re completely sure that the financial choice you’re making is suitable for your current financial needs. Be aware of all the options you’ve and choose an option that will help you clear your debt with a right approach.