Dealing with Debt: Consolidation vs. Debt Management
By Francine L. HuffMortgage Credit Problems Columnist
If you're like the average American, you may be carrying more debt than you can comfortably afford. But don't despair, because help is available. However, it's important to understand the difference between debt consolidation and debt management.
Debt Consolidation Loan
Many people looking to lower their monthly debt payments turn to consolidation loans customized by type of debt. This can allow you to combine all your credit cards, auto loans, and other unsecured debts so that you only have one monthly payment. A home equity loan or home equity line of credit (HELOC) can be used for this purpose. A debt consolidation loan will require you to use your home as collateral, so if you miss payments, you could end up losing the house.Although debt consolidation can help you get a better interest rate and lower payments on your consumer debt, it won't solve the problems that got you into debt in the first place. If you need more help fixing your money woes, a debt management plan could be helpful. Check out debt consolidation services carefully before signing up--reputable companies provide valuable services, but like every industry there are shady characters to avoid.
Debt Management Plans
Some organizations that offer credit counseling may recommend you sign up for a debt management plan. Make sure the organization is a reputable one before signing up so you don't get taken for a ride. A debt management plan requires you to make a deposit with the credit counseling agency, which then uses the money to pay your credit card bills and other loans. The credit counselor will work out a payment plan with your creditors, who might agree to lower your interest and fees if you enroll in a debt management plan. They also will help you set up a budget.Be cautious when selecting an organization to work with you to manage debt. Check with the Better Business Bureau or your state attorney general's office to see if there have been any complaints filed. If you enroll in a program, check your monthly statements to make sure payments are being sent on time and that all your creditors are being paid. If payments are not made on time, your credit will suffer.
No one solution works for everyone. But if you can't solve your financial problems alone, a debt consolidation or debt management service may help you learn from the past and chart a smoother course for the future.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
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