Options to Stop Debt

Debt Consolidation Loans Vs. Non-Profit Credit Counseling

If you are struggling with debt, you may have found yourself looking on-line or watching ads offering ways to help you get out from under those credit card bills. Two of the most popular choices for are debt consolidation loans, either unsecured or by using your home equity and credit counseling services. Both typically maintain that they can save you money and eliminate your bills faster than you can on your own.

What is a consolidation loan? This loan may be secured or unsecured, but most often people consolidate debt by using a home equity loan. The loan enables you to pay off your creditors now, and make a payment to a single loan thereafter. The interest may well be lower on your new loan than on your credit cards, and if it is a second mortgage, it can even be tax deductible.

Credit counseling services are supported by the credit card industry. These services range from fairly well known and reputable to somewhat questionable. When you enter a credit counseling arrangement, they will negotiate payment terms with your creditors. You will make a single payment to the service and they will make payments to each debt owed from that payment. They can often manage to negotiate lower interest rates or settle some debts during this process.

While both strategies might enable you to save a bit on the debt repayment process, neither is perfect. Debt consolidation, particularly in the form of a home equity loan, does not damage your credit particularly, especially if you were current on your credit card payments. It does open a new line of credit, and you should keep your total credit in mind when considering the impact on your credit report. You should also close lines of credit you will no longer be using when you pay off your credit cards with the consolidation loan. Consider seeking out financial counseling to prevent a spending relapse. Many people who opt for consolidation as a repayment strategy find that within just two years they are in substantially more debt than  they were initially.

Credit counseling services, on the other hand, can impact your credit rating more significantly. Your credit report will note that you are in a nonprofit repayment program. You may also find that some agencies make payments on set dates, but have not adjusted your payment due dates. If you choose this option be sure you are taking an active role in making sure that your creditors are receiving payments when they are due. The service will also teach you budgeting and may be a valuable tool in preventing future financial difficulties; however, you may find it difficult to rent a home, buy a vehicle or otherwise access credit in any way during the course of your credit program. Many people opt to drop out of credit counseling programs before completing them, leaving them managing debt on their own.

If you are looking to get out of debt, consider a smart program that teaches money management and repays debt while creating savings and building an emergency fund. You may find this more effective, financially healthy, and practical.