Do debt consolidation companies work?

Ask The Expert: How Do Debt Consolidation Companies Work?

Question: I have around $9,000 I’m carrying on a half-dozen credit cards, and I don’t know what to do anymore. I’ve tried all the tricks, from calling the card companies asking for a break to switching to some cards with lower interest rates. But I can’t catch up.

I’m thinking of going to one of those credit card consolidation companies, but I don’t know if they’re shady or not. I saw you wrote a book — sorry, I didn’t buy it — that said you started a company that does this stuff. So how do these companies really work? And how do I tell if they’re going to rip me off?

— Anna in South Carolina

Howard Dvorkin CPA answers…

Howard Dvorkin on how to get out of debt fastYou’re right, Anna. More than two decades ago, I founded a nonprofit called Consolidated Credit. Based on my years in the profession, I can assure you — some companies aren’t as credible as others. Then again, name one profession that doesn’t have some bad characters.

Thankfully, most debt consolidation companies are honest, and all of them are regulated by the federal government. If you want to find a reputable one, here are three questions to ask. Thankfully, the answers are very easy to find…

  1. Who endorses you? The company I founded earned an A-plus rating from the Better Business Bureau and a stamp of approval from the local United Way. Companies that have done the same will surely boast about these endorsements on their homepage.
  2. Who covers you? When I ran my own company, we were interviewed by CNN, USA Today, Forbes, and other national media outlets. Again, you’ll be able to spot those logos on the company’s homepage or in a press section.
  3. Who accepts you? My company became a member of the Association of Credit Counseling Professionals, which only accepts companies that adhere to its strict standards.

Now that you know how to find a good company, Anna, let me explain exactly how they operate.

Behind the consolidation curtain

The process starts in earnest with a phone call to a credit counselor. (Another tip: Ask if those counselors are certified, which means they passed a test that demonstrates their knowledge in the field.)

The counselor assembles a comprehensive list of your debts, then works with your credit card issuers to figure out a repayment plan — this is called a debt management program. Basically, you pay one lump payment to the debt consolidation company per month, which then parcels it out to your creditors. Those creditors agree to reduce or even wipe out your interest rates.

I suggest you click that link and read it thoroughly, because like everything else in the world, there are pros and cons. For instance, debt consolidation can help your credit score – or hurt it if you’re not careful.

One reason I started Debt.com was to point people in the right direction. Sometimes, you can solve your debt problems with other tools than the one you originally thought of. If you fill out the debt analysis above or call the number listed there, a real live human being will walk you through your options — for free.

That’s my final piece of advice, Anna: Never pay for advice. Any reputable firm will talk with you and not charge you. If they try to charge you a “consultation fee,” hang up.

Have a debt question?

Email your question to editor@debt.com and Howard Dvorkin will review it. Dvorkin is a  CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

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