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Is Debt Consolidation or Debt Management right for you?

Every day, many financially troubled consumers visit Credit Counselors web sites in search of information about debt consolidation. While Credit Counselors does not offer debt consolidation services, we are able to help many people regain control of their financial lives through a Debt Management Program (also known as a Debt Management Plan, or DMP). There are key differences between these two approaches to resolving money management problems. Here are some things to consider before committing to a debt consolidation loan.

Debt consolidation is typically thought of as refinancing several loan balances into one. One example of debt consolidation would be paying down several credit cards using a second home mortgage or a home equity line. While this might look appealing to some because of the lower mortgage interest rate, there are some factors to consider:

  1. Do you have equity in your home? Ask yourself if your house is worth more than you owe on it. If you do have equity, how much? In today’s market, housing values are falling in many areas (or, at best, holding steady). Is it wise to put your home on the line to pay off credit cards? Credit card debt is typically considered unsecured. This means that the only collateral underwriting your credit card balance is your signature. A decision to pay off unsecured debt using a loan secured by your home requires careful consideration.
  2. Second mortgages and home equity lines of credit usually carry long terms, so while your interest rate may be lower, you pay it longer. Use Credit Counselors’ credit card interest calculator to determine if paying the same amount on your credit cards as you would a second mortgage or line of credit would pay them off more quickly.

Another way to consolidate debt is to roll several unsecured debts (like credit cards) into one credit card with a lower interest rate. Be sure to read the terms of the offer carefully. Beware of teaser rates that rise after a number of months, or offers that stipulate a minimum that must be charged each month the promotional rate is offered. You usually need a good credit rating to secure a high-limit/low-rate credit card. If you’re already behind or maxed out, this may not be an option.

Debt Management Program (DMP) – A DMP is one possible outcome of a budget and credit counseling session. Credit Counselors offers no-cost credit counseling. Get started now or call us at 800-397-2609 . During a credit counseling session, one of our NFCC-certified credit counselors will review your income, help you develop a budget that you can live with, and review your debts. In most cases, a DMP is not needed. Simply adjusting your monthly budget, along with helpful referrals, will get you “back in the black” (as opposed to living in the red – spending more than you make each month). Every client leaves a credit counseling session with a budget and a step-by-step action plan pointing them in the right direction. In cases where Credit Counselors cannot help you balance your budget or find an appropriate referral, a counselor may recommend a Debt Management Program. A DMP works like this:

  1. Credit Counselors negotiates with your creditors to accept a smaller monthly payment over 48 to 60 months (in most states). Most major creditors have already instructed Credit Counselors what percent of a balance they will accept at what interest rate. This payment and lower interest rate can save some families hundreds of dollars per month, and gets consumers out of the “paying only the monthly minimum” rut. You can find yourself debt free in four to five years (or sooner if you can afford to pay more as your circumstances change).
  2. Credit Counselors asks your creditors to waive any late or over limit fees you have acquired, and re-age your account. That’s just a fancy way of saying that they bring your account current, so you’re no longer behind, it puts an end to late-fee accumulation, and stop those stressful collection calls.
  3. Credit Counselors arranges for one monthly payment to be withdrawn from your bank account automatically. Credit Counselors then sends a pre-arranged payment to each of the creditors listed on your DMP. As you pay off your creditors, and work towards being debt free, the remaining credtiors get a larger payment, while your monthly payment remains the same. Be sure to call Credit Counselors frequently to update your balances.

Because a DMP means you make one payment for all creditors, some people confuse it with debt consolidation. The difference is that, through a DMP, you’re not opening a new line of credit. Your debts are still yours; we just negotiate a lower payment and a lower interest rate on your behalf. Before you consolidate your debt, discuss your options with a Credit Counselors counselor at no cost. We know you’ll learn something about sound money management. After all, financial education has been Credit Counselors’ mission for more than 30 years!