At a Glance
Debt consolidation can be a valuable tool to help borrowers streamline and simplify debt payments. But debt consolidation scams can compromise your personal information, cost you money, and even wreak havoc on your credit score. So it’s important to know what red flags to look out for to learn how to avoid debt consolidation scams.
In this article, you’ll find:
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts into a single new loan. The most popular tools for individuals to pursue debt consolidation are balance transfer credit cards and personal loans. The best debt consolidation personal loans will be offered to those with great credit, but borrowers may also be able to find a debt consolidation loan with bad credit.
If you have a lot of debt or find yourself in a more complicated situation, you may want to seek out assistance. That’s where a debt consolidation company comes into play.
Debt Consolidation With a Non-Profit Credit Counseling Agency
A non-profit credit counseling agency helps borrowers repay their debt by collecting payment and disbursing it to creditors on the borrower’s behalf. Sometimes, credit counselors will also help create Debt Management Plans (DMP).
DMPs can be a reasonable alternative for borrowers who want someone else to manage their payments. However, the downsides of a DMP are that you may have to close credit cards, and it puts a flag on your credit report. That means you may not have access to new credit until the plan is complete.
Debt Consolidation and Debt Settlement Companies are Not the Same
Debt settlement, also referred to as debt relief, differs from debt consolidation in that you’re attempting to negotiate with creditors to pay less than what you owe. The process of debt settlement is typically to stop paying creditors. Then, the settlement company attempts to get creditors to settle for a lower amount.
The obvious downside to debt settlement is that ceasing payment to creditors is going to cause damage to your credit score. You may also be sued by creditors who want their money. So if the path of ultimately paying less than what you owe seems appealing, debt settlement companies are available to help with the process. They typically do so by having you make payments into an account that they’ll then use to negotiate with creditors.
How to Spot Debt Consolidation Loan Scams
There are many red flags to look out for when it comes to debt consolidation companies. Keep an eye out for these to avoid debt consolidation loan scams.
The company guarantees they’ll lower the amount you owe
The process of debt consolidation takes existing debt and combines it into a single loan. So no changes are made to the actual balance due. Any company that claims to be able to lower what you’ll actually need to pay to your creditors is likely a debt settlement or debt relief company. Or they may be operating a credit consolidation scam.
The company is pushy and requires you to act now
Deciding whether or not to consolidate debt is a big decision. And companies that are forcing you to sign up for a program immediately should throw up a big red flag.
The company asks you for an upfront payment
If you pursue debt consolidation yourself, you may have a loan origination or balance transfer fee. But unless a company has successfully reduced your rates or settled debts, there shouldn’t be any reason for fees.
The company refuses to let you see their terms
Reputable debt consolidation companies have no problem disclosing fees, terms, and conditions. If the company is sketchy about what information they’ll provide, it’s time to cut off communication.
The debt consolidation company contacts you
Reputable non-profit debt consolidation companies will let you come to them. But mailers or phone calls may come in from debt consolidation scam companies. So if you receive one of these inquiries, be wary. And always follow the below steps before signing on for a service that ends up being a scam.
Steps to Avoid Debt Consolidation Scams
People have come across every type of scam, from student loan debt consolidation scams to credit consolidation scams. Often, the companies are making impossible promises that seem too good to be true. Before you go forward with any debt consolidation company, take these three steps to avoid scams entirely.
Research the company online
When researching debt consolidation companies online, look for consumer reviews and ratings through the Better Business Bureau. As you review the company website, be sure the web address starts with https, and there’s a lock symbol in front of it. That means any information you send is secure. You’ll also want to be sure the website lists a physical address for the company, and the site is mostly free from error messages, typos, and other common signs of a scam.
Compare multiple offers
Once you research companies and have found legitimate contenders, it’s essential to compare specifics side by side. That means looking at things like debt consolidation loan requirements, which may include credit score minimums and fees. Once you dig into the details, it often becomes obvious which debt consolidation company is the best option.
Call your creditors
Your creditors may have helped other borrowers work through debt consolidation and have recommendations for legitimate companies. They’ll also likely be aware of scams and can alert you before you start working with an illegitimate company.
Are debt relief programs scams?
Debt relief is different than debt consolidation. While some debt relief programs are reputable, it’s an industry rife with scams. Some red flags to alert you of a scam are if companies request payment upfront, promise to reduce or eliminate your debt, or withhold information about services until you provide payment.
Does consolidating debt ruin your credit?
When done properly, debt consolidation won’t ruin your credit. In fact, it can actually help boost your credit score. That’s because moving from multiple monthly payments to just one often increases a borrower’s likelihood of making on-time payments. Plus, it can help lower overall credit utilization, which may boost your score a few points as well.