Should You Choose Debt Consolidation or Credit Counseling?

Learn more about the advantages and disadvantages of both of these approaches to debt resolution to help determine which one is best for you.

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Pros and Cons of Debt Consolidation and Credit Counseling

The short answer to that question is: Yes.

As flippant as that sounds, it can’t be stressed enough that if your drowning in debt, you absolutely need to seek a real solution. You’ve heard about two common forms of help – debt consolidation and credit counseling – and wonder which is right for you. Good. You need to make a choice and move forward.

But, understand that this is not entirely an either/or situation. Credit counseling may actually lead you to select an action plan that includes some form of debt consolidation.

What Is Debt Consolidation?

At its most basic, debt consolidation involves combining multiple debts into one that both simplifies your debt and makes it easier to pay off. There are three basic ways to do it – debt management programs, debt consolidation loans and debt settlement plans – but we’re going to focus on the first two.

Debt management programs involve a carefully designed payment schedule that consolidates credit card debts into a single, affordable monthly payment.

The programs are set up by a nonprofit credit counseling agency, which works with your credit card company (or companies) to reduce the interest rate on your debts and arrive at an affordable monthly payment.

The counseling agency receives your monthly payments and distributes them to each of your creditors in an agreed upon amount.

In such programs, you agree to stop using credit cards. The tradeoff is you get lower interest rates and lower monthly payments on existing credit card debt, enabling you to pay off your debt in 3-5 years.

It should be noted that debt management programs are NOT loans and you do NOT receive any reduction on the amount owed. They seek to eliminate debt by reducing interest and monthly payments.

Debt consolidation loans, on the other hand, are exactly what the term implies: You’re borrowing to pay off your debt.

You take out a single, large loan that allows you to pay off all of your credit card debts. After that, you repay the large loan with a single, monthly payment. These loans come in a variety of forms, but typically are done through home equity or personal loans.

Debt settlement is a last resort for debt consolidation. An attorney or debt settlement company helps you and the creditor agree to pay less than what is owed to settle the debt. However, there are many complications with this program, not the least of which is your credit rating drops significantly (about 100 points, and the fact you didn’t pay in full is a negative that shows up on your credit report for seven years.

Advantages of Debt Consolidation

All debt consolidation methods simplify the process of paying down your debts. Making one monthly payment is easier to keep track of and helps eliminate late fees, as well as annoying collection calls.

Debt management plans reduce the interest rates on credit card debt to make paying it down more affordable and creates a timetable for eliminating it entirely. By not using credit cards during the process, you’re not sabotaging yourself and adding additional debt. Over time, this method improves your credit score because you’ll be making payments on time.

Debt consolidation loans can take not only credit cards but all of your unsecured debt – including student loans and medical debts – and wrap them into a single debt with a single monthly payment. This makes budgeting a simple process. If it’s a home equity loan, the interest paid is tax-deductible.

“It won’t reduce the total amount of debt but with a lower interest rate it can provide substantial savings in the long run,” said Chane Steiner, CEO of “I recommend taking this route if you have a good credit score and qualify for a low interest rate, especially if any of your debt is charging a relatively high rate.”

Disadvantages of Debt Consolidation

Debt management plans apply only to credit cards, and if you miss a payment, you lose the interest rate concessions the card companies made. This method also requires discipline, because you give up revolving credit except in emergency situations. Most credit card companies will reduce your interest rate, but they are not compelled to do so.

Debt consolidation loans are usually secured loans, and obviously so in the case of a home equity loan. You put your house at risk if you fail to make payments. If you do get an unsecured loan, the interest rate and monthly payments will be higher. Your credit score also will go down when you’re in a debt consolidation program.

Be careful about what you include in debt consolidation. If you have no- or low-interest loans such as medical bills and consolidate them with high-interest debts, you negate some or all of the benefit. Also, don’t get so focused on monthly payments that you don’t look at how much interest you’re paying. A longer-term loan typically reduces monthly payments, but increases the total amount paid toward the debt. Consolidating federal student loans ends any protections and repayment options associated with them.

A potential problem with debt consolidation is that it doesn’t fix the behavioral issues that got you into debt in the first place, notes CPA Ben Watson of You can’t continue to rack up multiple lines of credit at the same time you’re trying to get out of debt. Also, Watson says, beware of plans that involve paying additional money in “closing fees.”

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What Is Credit Counseling?

If the idea of borrowing money to get out of debt feels counterintuitive, that’s understandable. At the very least, you might want to talk with somebody who can explain the alternatives and help you choose a path to a more solid financial footing.

That’s what credit counseling does. A credit counselor discusses your financial situation to find a reasonable solution for you. You’ll need to provide the credit counselor with a lot of information – how much you owe, how much you earn, your expenses and what assets you have that might help you eliminate or reduce your debt.

Advantages of Credit Counseling

It’s hard to be confident that you’re on the right track if you don’t understand how bad your situation is and what your options are. If you are behind on your bills, struggling to make minimum monthly payments, or if you’re overwhelmed, credit counseling can be a good start.

Credit counseling can help you create a workable budget, understand your credit report and credit scores, create a plan to get past-due bills up-to-date and help you work out a debt management plan with your creditors. Ultimately, that play might include debt consolidation.

Disadvantages of Credit Counseling

You want to make sure the person advising you has your best interests in mind. Ask how the credit counselors are compensated. Do they get paid based on you following their advice? You want to make sure the counselor has your best interests in mind. Credit counselors may charge fees, but many nonprofit services can be provided for free or for a low fee.

If a credit counselor asks for upfront fees before they provide services, that’s against the law. Look elsewhere. Other warning signs are if the company asks for voluntary contributions for their services, claims affiliation with government or law enforcement agencies when it has none or promises to get you out of debt quickly.

A credit counselor may also prove helpful, but it’s important to remember that enlisting a counselor will cost money, and “there are ample free resources available to help you learn the ropes of debt management,” said Oliver Browne, credit industry analyst with Credit Card Insider. “If you decide to go down the route of credit counseling, do your homework. Most credit counseling organizations are nonprofit organizations, but there are companies out there who are looking solely looking to make money.”

Deciding Between Debt Consolidation and Credit Counseling

If you think you have a handle on your debt situation and only need to simplify and lower your monthly payments, debt consolidation looks like a good way to go. Steiner recommends this approach if you have a good credit score and can qualify for a low interest rate.

The more complicated your circumstances, the more that credit counseling makes sense, if only for your peace of mind. If you need to correct an immediate problem and learn how to not repeat it, a financial pro can put you on the right path to financial stability.

And that’s where we all want to be, right?

About The Author

George Morris

In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.


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