Many people believe that when they go to see a credit counselor, they will learn how to consolidate their debt. They don’t know that these two services are completely different and while some credit counselors know how to consolidate debt, this is not their main function. Depending on what your credit situation is, you may need the services of both of these professionals. Below is a description of what each of these services mean. You will need to choose which of them is right for you.
What is Debt Consolidation
Debt consolidation is the process by which you reduce your monthly payments by combining all of your credit card bills and loans into one single loan. This method of reducing your monthly outlay of money will not reduce your outstanding debt, it will only reduce the monthly payments.
Let’s say you have three credit cards and a personal loan which you are paying on each month. For credit card A, you are paying $50.00 per month with a balance of $1,000.00 outstanding, credit card B’s payment is $25.00 per month with a balance of $500.00 outstanding, credit card C is $65.00 per month with a balance of $1,200.00 outstanding. Your personal loan is costing you another $85.00 per month in this scenario and has an outstanding balance of $3,000.00. Combined together, you monthly payments from your income is $225.00. Your outstanding balances on this accounts is $5,700.00
The interest rates you are paying for these cards and loan range from fourteen percent to twenty eight percent which is what most of your payment is month is put towards. As you can see, the monthly outlay of monies is quite high and in todays weak economy, this could be a large portion of your income. Reducing this amount of money each month will allow you to possibly make extra payments reducing your debt quicker. This is where debt consolidation comes in.
By taking all of your outstanding credit card and personal loan bills and combining them into one loan at a lower interest rate will reduce your monthly payments. The loan you take will also have an ending date of maybe 5 to 10 years depending on the amount you owe, unlike credit cards that may take more than fifteen to twenty years to pay off. A loan in the amount of $5,700.00 as in the example above, at an interest rate of 11.5%, payable over 4 years will have a monthly payment of $148.71. You have now reduced your monthly payments by $76.29, and, you will have the loan paid off and be debt free within four years.
What is Credit Counseling
Credit counseling is very similar to debt consolidation in that you will learn how to reduce your debt, but, credit counselors are mainly concerned with teaching you how to get out of and stay out of debt for good. As stated above, credit counselors may be able to show you ways to reduce your monthly payments by giving you information on debt consolidation and other means, but, the main focus of credit counselors is to show you how you are getting into debt.
Many people when asked how their monthly credit card and loan bills got so high and out of control, will tell you that they just don’t know. Many times they feel that things just got away from them. They cannot tell you where they have spent the money, on what or why. This is how most people get into debt in the first place. It may have started with an emergency purchase. Your washer or dryer broke and you must get another one now. You go into your favorite retail store and they are having a “great sale”. Great sale is a term that you must be careful around. Not every great sale is a great sale,especially when it causes you to get into debt that you cannot afford.
You have found this great sale on washers, you need one and don’t have the cash for it right now. The store, along with this great discount on the washer you want, is offering a special rate on their credit card if you purchase, AND, if you pay it off within 6 months, there is no interest. This sounds like the best situation for you. You apply for the credit card, buy the washer at the great sale price of $850.00 total and off you go. Seems perfect and you have your new washer.
Have you thought about how much you will need to pay each month in order to have this paid off in six months? Okay, it comes to $141.67 each month. Did you read the fine print? If you don’t pay it off in six months, not only will interest need to be paid on the amount, but, they will also charge you interest from the day of purchase. So, in six months, if not paid in full, you will be paying the interest back from the day you bought your washer. Retail stores depend on your not paying this in full in six months and that is why the offer it.
Credit counselors will show you where your debt began and will show you how to avoid many of these mistakes that people make. They will also show you that what you think was an emergency may have been able to wait until you had cash in hand to pay for that washer.
