Debt Consolidation

Credit Counseling vs. Debt Consolidation – What is the Difference?

Consumers in need of relief from financial pressure and strain have many options available to them. But knowing which one is best for your particular situation can be confusing.

In this article, we’ll take a look at two of those options: credit counseling and debt consolidation. We’ll cover how each one works and which one makes sense for you.

Credit counseling, a process where a consumer works one-on-one with a financial professional, addresses multiple areas of one’s financial situation. Debt consolidation, meanwhile, combines numerous debts into one new loan or credit card and specifically focuses on a consumer’s debt.

Both credit counseling and debt consolidation can relieve a consumer’s financial issues. While there is some overlap in what each one accomplishes, they are two very different paths with distinct processes and results.

Which path you should take depends on your end goal and the extent of your financial issues.

What is credit counseling?

How to find a credit counselor

What is debt consolidation?

How to consolidate your debt

Credit counseling vs. debt consolidation: Which is right for you?

What is credit counseling?

Credit counseling, to dig a little deeper, is when a consumer works with a trained professional to help them manage and understand their financial situation.

Through one or more sessions, credit counseling can address a variety of areas depending on the consumer’s needs. It can focus on a current crisis, such as falling behind on payments and dealing with creditors, or it can take a complete look at a consumer’s financial picture, including budgeting, paying down debt and other areas.

Credit counseling can provide guidance in:

  • Creating a working budget
  • Reviewing and understanding your credit report and credit scores
  • Devising a plan to bring past-due bills current
  • Providing tools and resources to help you manage your finances
  • Helping you enter a debt management plan with your creditors

Bruce McClary, vice president of communications for the National Foundation for Credit Counseling (NFCC), said working with a counselor can be an effective approach for consumers looking to correct past financial mistakes.

“If a person who is already behind on their payments is interested in getting back on track with their financial situation and receiving guidance from a professional who will be with them at every step of the way, then credit counseling can provide that,” he said.

Typically, consumers have an initial consultation with a credit counselor to review their situation and determine a course of action. Next steps can include additional counseling sessions, providing the consumer with further education and resources, or the counselor may recommend that the consumer enter a debt management plan to get and stay current with their payments.

“Entering a debt management plan sometimes is recommended as a part of counseling, where the credit counseling agency can provide additional guidance towards creating a debt repayment plan that fits within the person’s budget and gets them to their goal of being debt-free,” McClary said.

A debt management plan can only address unsecured debts (those that are not tied to an asset) such as credit cards, some personal loans and some past-due medical bills. Consumers who enter a debt management plan will typically be required to close the accounts while they are enrolled in the program, which usually takes four to five years to complete.

Depending on your situation and your ability to pay, there may be fees associated with your counseling session(s). If the counselor recommends you enter into a debt management plan, there usually is a fee associated with that, typically ranging from $25 to $35 a month for NFCC-affiliated organizations.

Credit counseling can be an effective solution in the following scenarios:

  • You are behind on your bills
  • You have poor credit as a result of mismanaging your money
  • You are overwhelmed by your financial situation
  • You want to learn how to manage your money better

How to find a credit counselor

Credit counseling is offered by a variety of sources ranging from agencies to individuals. A few sources include:

Agencies typically fall into one of two camps: nonprofit and for-profit. A nonprofit counseling company or organization doesn’t necessarily mean the services are free, but it does indicate that the agency operates differently on how its fees are structured.

“There are very strict guidelines and limitations on the fees that can be charged in association with nonprofit counseling agencies,” McClary told LendingTree. “Whereas for-profit credit counseling companies have no restrictions on the amount that they can charge.”

Furthermore, there are differences in how the services are offered. “Nonprofit agencies are very education-focused and very holistic in their approach to resolving a person’s financial issues, so there’s going to be a lot of financial education packed into the services,” McClary said.

Because for-profit agencies do not have the same mandates about providing education, you are likely to see more differences in how they approach providing resources and information to their clients.

If you pursue credit counseling, whether it’s from a nonprofit agency, a for-profit company or an individual, it’s in your best interest to research a few different options and ask questions so that you can compare services.

Some questions to ask include:

What services do you provide?

Choose to work with a company or organization that offers multiple services, including counseling on budgeting, debt and credit issues. Be wary of any company that only provides one type of assistance such as a debt management plan. Also, look for a company that can help you beyond a current crisis.

When and how will our sessions take place?

Typically, counseling sessions can be in person, over the phone or online, so consider which method suits your personality and your schedule.

What are your fees?

Fees can vary from company to company, so be sure to compare and ask for the prices in writing.

How do you get paid?

Avoid working with a counselor or company that gets paid by directing you to a particular service or product.

Do I need to sign a formal agreement or contract?

Read any agreement in detail before signing, and make sure you understand the details thoroughly.

Will you work with me even if I cannot pay?

Nonprofit agencies are required to work with consumers regardless of their ability to pay.

How are your counselors qualified?

Find out if the counselors are accredited or trained.

Do you provide educational resources without entering your program?

Avoid organizations that charge for information.

Are you licensed to offer your services in my state?

Some states require specific licenses, so be sure the company you are considering can legally work with you.

What is debt consolidation?

Different than a debt management plan that can often be a part of credit counseling, debt consolidation is another method consumers can use to address overwhelming debt obligations.

There are multiple ways to achieve it, but the bottom line in debt consolidation is to take the various debts you have and combine them by paying them off with one new loan or credit card. So instead of multiple payments at several different interest rates, you now have a single debt with one payment and one interest rate with one creditor.

Doing this does not reduce the total amount of debt owed, but it can save you money on interest provided the new debt is at a lower interest rate than the individual debts. It also can remove the confusion that can go with juggling many payments.

Options to consolidate your debt include:

McClary said debt consolidation could be a great option, especially if you are likely to qualify for a low interest rate. “It could be a first choice for people who have very good credit scores,” he said. “You might get more affordable payments, and you might be able to put yourself in a situation where you’re able to pay off your debt much faster than you would have before.”

Debt consolidation can be advantageous in the following scenarios:

  • You have a good credit score and can qualify for a low interest rate
  • You have multiple high-interest debts
  • You are overwhelmed by juggling numerous payments
  • You have a steady source of income

While debt consolidation can help you pay less in interest and provide a streamlined approach to paying multiple debts, it does come with some risks. If you take low- or no-interest debts such as medical bills and lump them into the new loan, there is potential that you’ll end up paying more in interest than you would have previously.

Also, if you use a home equity loan or line of credit to pay off credit cards or other unsecured debt, you essentially put your home at risk should you be unable to pay off the new debt. Additionally, if you choose to consolidate federal student loans with a new loan, you lose any protections those debts previously had.

How to consolidate your debt

If you are interested in consolidating your debt, here are the steps to take.

Research lenders.

Again, there are multiple ways to pursue debt consolidation, so look into all your options. Start with your existing bank(s) and lenders with whom you have a relationship to see what products and rates they have available. Also consider smaller community banks and credit unions since they may have better rates and less stringent approval criteria. Additionally, be sure to look into online banks and lenders.

Get preapproved.

Preapproval is usually associated with mortgages, but you can quickly get preapproved for personal loans and other products. Often, you can get preapproved for multiple loans with one application.

Review and compare loan terms.

When comparing multiple products, be sure to look at the APR for an apples-to-apples comparison. Familiarize yourself will all the loan terms and fees, including introductory interest rates that will expire.

Choose a loan.

Select the loan or product with the most favorable terms. When consolidating your debt to ease financial strain, it’s crucial to keep in mind that the total amount of debt you owe has not changed. While having all your debt in one place can provide some relief, you need to take precautions not to make your situation worse.

Make your payments on time.

If you struggled with late or missed payments before the consolidation, commit to paying the new debt on time. Setting up automatic payments with your lender or through your bank’s bill-pay service is an excellent way to guarantee on-time payments.

Avoid new debt.

A common risk with debt consolidation is the possibility of going even further into debt since you freed up credit cards and other loans by consolidating them. Determine to avoid running up those balances again or taking on additional debt.

Credit counseling vs. debt consolidation: Which is right for you?

So how do you determine whether you should pursue credit counseling or debt consolidation? Again, it depends on what you ultimately want to do.

If you want to address multiple areas of your finances and are looking not only to handle an immediate issue but also to take preventative measures to avoid getting into trouble again, then you may want to consider credit counseling. Working one-on-one with a financial professional will provide you with the necessary tools to help you address your finances both in the short and long term.

But if you have a relatively good grasp of how to manage your financial situation and are just looking to streamline your monthly obligations and lower your total monthly payments, then debt consolidation is probably a good option for you.

Regardless of which one you choose, McClary stressed the importance of researching lenders and organizations when considering your options. “You really want to make sure you’re comfortable with the company or the organization that’s providing the service,” he advised. “Make sure they’re reputable lenders. Check them out thoroughly, and look at consumer feedback. You can do everything from Yelp to the BBB.”

Additionally, be sure to see the option you do choose as a fresh start. Address any habits that led to the overwhelm or mismanagement of your debt in the first place so that you can avoid repeating the same mistakes.


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