A common question I am asked is what’s the difference between credit counseling and debt consolidation. These are entirely different concepts. Through credit counseling, you will learn how to solve your debt problems. You will also learn how to change your habits and hopefully avoid similar problems going forward. Debt consolidation removes your outstanding debt, but does not fix or solve any underlying issues.
What is Debt Consolidation?
When someone has a lot of debt across multiple creditors, they may be contacted by these companies. They will offer to consolidate, or combine, your debts into one payment. Instead of paying off every individual creditor, you will only pay them. They will charge a monthly fee for this service.
The Truth about Debt Consolidation Companies
This may seem appealing, because they may offer smaller payments or lower interest rates. Debt consolidation companies generally use a three-prong approach. This includes reducing the outstanding debt, extending the duration of the loan, and or lowering the interest rates. If they only extend the duration of the loan, you will be paying much more money in the long run.
Debt consolidation companies charge a monthly fee and may charge a setup fee for doing something you could do yourself. Most importantly, the overspending habits that led to the debt in the first place are still there. Instead of learning to solve your debt problems, you are only adding to them. Debt consolidation companies put a temporary band-aid on a larger issue. Essentially, they “give a man a fish” instead of teaching them to fish.
So How Can I Get Out of Debt?
There is no quick fix for eliminating debt. The only way to truly get out of debt and stay out is to change your habits. Learning the fundamentals of credit and personal budgeting will help you pay off your debt. You will also be able to avoid falling into debt in the future. Working with a professional money coach is an investment in your financial future. This is far more effective than paying debt consolidation companies to pay your bills for you.