Avoiding Debt Consolidation Scams

June 26, 2024

By K-Staff

Credit, Fraud, Insighter

Being in debt is a difficult situation – a few late payments, a few extra credit cards, and your credit score can start to suffer. Sometimes it can feel like your payments aren’t getting you anywhere, and desperation starts to kick in. Offers to help you build your credit score quickly or eliminate your debt sound like just what you need to escape the debt cycle – but you can find yourself in even deeper trouble if you deal with companies promising immediate debt relief.

So how can you make your debt situation more manageable without being falling prey to scams and predatory lenders? Let’s cover the basics.

Debt Consolidation: What Is It?

Debt consolidation is taking all of your outstanding debt and combining it into a single payment – this makes your payments more manageable. Fewer places to remember to pay, fewer payment deadlines to potentially miss, fewer fees! Used judiciously before you begin to miss payments, debt consolidation can help you minimize damage to your credit score.

Types of Debt Consolidation

Debt Consolidation Loan – a personal loan you use to pay off existing debt. Personal loans generally have more favorable terms and rates than credit cards.
Balance Transfer to Credit Card – performing a balance transfer from one higher-interest credit card to one with a lower rate can save you money on interest payments.
Debt Management Planning – With the help of a credit counselor, you can have your debt paid off, and the counselor can negotiate with creditors on your behalf.
Debt Settlement – If you can’t pay off the debt you have under any circumstances, your creditors may agree to accept a portion of the debt so they don’t have to write off the entire debt as a loss. Debt settlement can negatively impact your credit, though, as you could not fulfill your debt obligation.

Staying On Top of Your Debt

Make a budget. Figure out where your money is going, and try to cut your spending on unnecessary expenditures – this is often the first step in getting your debt under control.

Call your creditors. If you are getting behind on your bills, explain your situation with your creditors. It won’t eliminate your debt, but they can often work out a payment plan with lower, more manageable payments.

Target high-interest debt first if you can – the sooner you can pay down debts with the highest interest rates, the less interest you will pay in the long run.

How to Spot a Debt Relief Scam

If someone is trying to collect fees from before they do anything to help you deal with your debt, that’s illegal. Debt collection representatives can only charge fees after they have rendered services. Any request for payment up front is likely a scam.
If you are getting unsolicited phone calls or text messages offering to reduce or settle your debt, be cautious. Most reputable debt settlement companies don’t cold-call prospective clients.
High-pressure sales tactics or attempts to get you to act fast are also a red flag for scams. Debt consolidation options don’t disappear because you’re taking time to decide whether to use them.
Any promise of “guaranteed results” or similar claims to get you out of debt for pennies on the dollar is a red flag. There’s no guarantee that creditors will agree to the terms negotiated by a third party.
Representatives who claim they have access to “special government programs” or know loopholes to help you resolve your debt are usually just looking for your money.

How to Avoid Being Scammed

Research any companies you are considering. Look them up online, with the Better Business Bureau, and with your state’s attorney general to see if complaints have been filed about their business practices.
Don’t take the first offer that you see or comes your way. Find the offer that truly works best for you – there are many reputable debt consolidation loan lenders and programs out there.
Look for information about fees, and how they’re assessed. Some may charge exorbitant fees that cancel out any benefit you’d gain from debt consolidation, putting you in more debt than before.
Read the fine print. If you can’t understand what the company is hiding in their disclaimers, that may be a sign to move on.
Don’t pay upfront. Stay away from any company or representative who insists on payments before services are rendered.
Get everything in writing. Whether you’re dealing with a debt consolidation agency or settling your debts directly with your creditors, it’s crucial that you have a record of your agreement.