Deciphering the Facts: Debt Consolidation vs. Debt Management

With all the financial terminology that is floating around today, it is easy to understand how one might become confused with the true definitions of these terms. What is debt consolidation? What is a debt management program (DMP)? Are they the same thing or entirely different? The experts at our consumer credit counseling service (CCCS) agency explain the key differences between the two, and provide advice on how to determine which method will work best for your personal financial situation.

On a broad scale, the term 'debt consolidation' refers to the action of combining several loans and/or liabilities into one bigger loan. Usually, this is done to create a lower interest rate, and simplify the repayment process. However, it is important to fully understand the implications of choosing debt consolidation as a way to pay down debts. There are many variables involved, and differing types of debt consolidation:

• Consolidating unsecured debts - If you have several credit cards, for instance, and have outstanding balances on each of them, you may choose to consolidate those debts onto one credit card with a lower interest rate. Be sure to read and understand the Terms and Agreements section (otherwise known as the fine print) BEFORE you sign the credit card agreement. You may find that the lower interest rate you are offered was actually a teaser rate that is only available for a short period of time, and then rises significantly. Other credit cards require a minimum dollar amount to be charged on the card in order to maintain the promotional rate. Also, it is important to consider your credit rating. Typically, you need to have a good/high credit rating to receive a promotional offer that is worth convincing you consolidating your debts. You may also visit our credit card interest calculator.
• Using secured loans - Secured debts such as your home are sometimes used to pay down unsecured credit card debts because mortgage interest rates are typically lower than credit card interest rates, and there is a tax advantage to being able to write off interest payments. This can be done by taking out a second home mortgage or a home equity line of credit. However, you need to ask yourself several questions before considering this method as an option to pay down debts. 1.) Is my home worth more than I owe on it? 2.) Will I end up paying more in interest payments over time if I consolidate? A professional credit counselor can help you determine the calculations.

Debt Management Programs (DMPs)

Debt Management Programs, or as they are commonly referred to - DMPs, are typically offered by credit counseling organizations, if it is determined to be in the best interest of the client. During an initial no-cost credit counseling session, one of our NFCC-certified credit counselors will review a client's household budget, and provide viable ways to reduce debts and maintain a stable financial situation. Although in most cases a DMP is not necessary, it may be determined that a debt management program is the best course of action to get the client out of debt. This optional program works in the following way:

• Our consumer credit counseling service (CCCS) agency will negotiate with creditors on behalf of the client to reduce monthly payments.
• We will also work with the creditors to waive late and over-limit fees and essentially bring the credit accounts to a current standing (also known as re-aging).
• The client simply pays a once monthly payment through our consumer credit counseling (CCCS) agency (which can be electronically withdrawn from a client's bank account).

Seek Professional Guidance through Credit Counseling

Although these two methods of debt repayment may sound similar, the major difference between them is that one (debt consolidation) requires you to open a new line of credit. A debt management program (DMP) will not open a new line of credit, but will negotiate lower creditor payments on your behalf. If you find that you need additional guidance to clarify the differences between debt consolidation and debt management, do not hesitate to call our consumer credit counseling service (CCCS) agency at 1-888-656-CCCS.