Credit counseling and debt consolidation are two methods a consumer may use to develop strategies to get out and stay out of debt. Each has different effects on the consumer's life. Credit consolidation streamlines his finances by creating a single monthly payment to his creditors and credit counseling teaches him ways to budget and manage debt on his own.
Credit Score Impact
According to debt management company Consumer Credit Counseling Services, a popular misconception about debt consolidation is that it hurts your credit score. Consolidation through a debt management program does not have a negative impact on your credit score. A consumer who enters into a debt management plan may already have a significantly damaged credit score. When a credit card company reports a consumer's participation in a consolidation program to a major credit reporting bureau it may actually help his credit score because lenders view such a program as a responsible step in credit management.
Better Financial Planning
Credit counseling sessions administered by a licensed credit counselor or bankruptcy attorney may have a positive impact on the way a consumer views and uses credit. According to MSN Money Central, approximately one-third of people who used a licensed credit counseling service in 2009 were better equipped to handle finances alone after the counseling session. This number is low because of the difficulty associated with clearing out the financial clutter. A consumer may feel too overwhelmed by the process to know where to begin.
Financial Honesty
Credit counseling sessions or debt consolidation forces a consumer to get honest about her financial health and what it may take to pay down her debt. This level of financial honesty may show her that consolidation and counseling alone may not be enough to tackle her financial troubles. According to MSN Money Central, approximately one-third of all Americans who used a credit counseling service in 2009 were in too much debt for the service to be of adequate help. These consumers were referred to other programs like those offered through social services to better deal with the root cause of the debt problem such as a gambling problem.
Budgets and Bankruptcy
If your debt problems are still in a range where a consolidation service can help you, you may be required to come up with a monthly budget to help plan your expenses and get the most out of your income. This allows you to still keep food in the house while having enough left over to make your debt consolidation payments. If your finances are too far gone for consolidation help, bankruptcy may be recommended. If you have little or no assets, Chapter 7 liquidation may be the best option. If you own a home or business, Chapter 13 debt restructuring can allow you to keep your home while making payments to the court.
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