A reader wants to know if debt consolidation companies are legit and what she should expect if she calls one.
Question: I have around $9,000 that I’m carrying on a half-dozen credit cards, and I don’t know what to do anymore. I’ve tried everything, from calling my credit card companies to ask for a break to moving balances to new cards with lower interest rates. But I can’t seem to catch up. In fact, things are gradually getting worse.
I’m thinking of going to one of those debt consolidation companies that I’ve seen advertised, but I don’t know if they’re legit or if I’m about to get scammed. So, how do debt consolidation companies work? And how do I tell if they’re going to rip me off?
— Anna in South Carolina
Howard Dvorkin CPA answers…
More than two decades ago, I founded one of the first companies that provided a consumer debt consolidation program. My goal was to help all the people I worked with as an accountant who weren’t able to overcome challenges with credit card debt on their own. Based on my years in the industry, 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…
- 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. Look for these kinds of endorsements on the company’s website or ask for them when you call to speak to a representative.
- 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 their press section.
- Who accepts you? My company was a member of the National Foundation for Credit Counseling, which only accepts companies that adhere to its strict standards. There’s also the Financial Counseling Association of America. If a debt consolidation company is a member of one of these organizations, you can have peace of mind that they’re legit.
Now that you know how to find a good company, let me explain exactly how they operate.
Debt consolidation companies vs. lenders
First, it’s important to understand that companies the provide debt consolidation programs are not lenders. They’re commonly referred to as consumer credit counseling agencies. These companies do not loan you money. So you’re not getting a debt consolidation loan to pay off your existing debts. Instead, they help you enroll in a debt consolidation program. This is basically a professionally assisted repayment plan. You still owe your original creditors. The debt consolidation company simply helps you pay them back in a faster, more cost-effective way.
Credit counseling agencies come in two flavors — for-profit and nonprofit. Nonprofit agencies are better for two reasons:
- They’re required to be impartial. In other words, they can’t tell you that their program is the best option unless it’s the best option for your financial situation.
- They won’t charge any upfront fees. This allows you to get an impartial, professional evaluation of your debt without any strings attached.
What to expect when you work with a debt consolidation company
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.)
During the call, the counselor will evaluate your debts, credit, and budget. The goal is to see if you are eligible for a debt management program and to determine if its the best solution for your needs. The call takes about 30 minutes.
Once they confirm that the program is your best option to get out of debt, they work with you to find a monthly payment that you can afford. Then they call your creditors to start negotiating. The goal is to get your creditors to accept a reduced monthly payment through your debt consolidation program. They also negotiate to reduce or eliminate interest charges and stop any penalties you may be incurring each month.
After your creditors sign off, your program officially starts. You pay one lump payment to the debt consolidation company each month and they parcel it out to your creditors. Since your creditors agree to accept reduced payments, you don’t receive any hits to your credit score for not paying. In fact, you actually build positive payment history with all of your creditors with each payment you make on the program. This is why debt consolidation programs can be good for your credit as long as you keep up with the payments, as opposed to debt settlement programs that hurt your credit.
But the program isn’t without its downsides. Any accounts you include in the program will be frozen for the duration of your enrollment. That means you can’t make new charges. You also can’t get any new credit cards. However, you can get loans like an auto loan. Basically, you won’t be able to use credit cards, but you won’t have to put your life on hold either.
Debt.com can connect you with an accredited consumer credit counseling agency, so you can see where you stand and find the best solution for your needs
One reason I started Debt.com was to point people in the right direction for solving debt problems. Consumer credit counseling is often a good place to start when it comes to credit card debt, especially if you call one of these nonprofit agencies. If their program isn’t right for you, they’ll tell you and point you in the right direction. They’ll even tell you if debt settlement would be a better option.
Have a debt question? Can’t find what you need to know? We can! Submit any debt or finance question you have, and we’ll tap a pro who will respond as quickly as possible.
Published by Debt.com, LLC