Debt Consolidation Vs. Debt Management

Research credit counselors before choosing one.

Research credit counselors before choosing one.

If you are in so much debt so that you have creditors coming after you, or you are afraid you soon will, it’s a good time to take control of the situation. Debt consolidation and debt management are two possible solutions. Once you understand a little about these two methods, you can decide which one better suits you.

Debt Consolidation

Debt consolidation is moving your smaller debts into one large debt. This makes sense if you can move your credit card balances on high-interest rate cards onto one credit card with a low-interest rate, or if you can take out a home equity loan or borrow against your 401(k), which are both typically low-interest loans, which you use to pay off all your debts.

Debt Consolidation Precautions

If you transfer your debt to a low-interest credit card, make sure you know when the low interest rate ends. Many times, the low rate is only an introductory rate, which goes up when the introductory period ends. The new interest rate might be higher than what you were paying before. You have to be disciplined to use this method and pay off the card before the rate goes up, or transfer the balance to another low-interest rate card. You also should not use your credit cards anymore while you pay the debt. If you chose the home equity loan route, your home is now on the line. If you cannot pay back the loan, you can lose your house. With a 401(k), you are borrowing money intended for your retirement. If you change jobs, you must pay this loan back immediately or suffer a 10 percent penalty.

Debt Management

You work with a credit counselor when you enter into a debt management plan by letting the credit counselor take over your debt. This usually takes three to five years. You deposit money each month with the credit counselor, who uses this money to pay your bills, such as credit cards, student loans and medical bills. Debt management plans do not pay bills such as your mortgage, rent, utilities or food. The credit counselor in a debt management plan typically works out a bill paying arrangement with your creditors, can usually get your interest rate lowered on your bills and can get certain fees waived. When you enter into a debt management agreement, you must make your payments on time, and depending on your agreement, you may not be able to use any more credit during the debt management process.

Debt Management Precautions

Go through a reputable organization to find a good credit counseling organization. You can use the National Foundation for Credit Counseling to find one. Beware of any organization that tries to charge you high, up-front fees or high monthly fees for enrolling in a debt management program. If the fees are so great that you can’t afford it, look for a different organization. Don’t use a firm that won’t send you free information before you decide. Don’t trust a company that tries to enroll you in a debt management plan without first reviewing your finances or that doesn’t first try to teach you money management and budgeting skills. Ask whether the credit counselors are certified. Read your monthly statements to determine whether the credit counselor is paying your bills as planned.

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