How to Avoid Debt Consolidation Scams
Dealing with debt can feel overwhelming. After all, with all of those different minimum payments and interest rates, it can be hard to keep track. This is where debt consolidation comes in. Consolidating debt to a single monthly payment can be a relief and make it simpler to keep up.
Unfortunately, you might encounter debt consolidation scams that put your personal information at risk, damage your credit or bury you in hidden fees. Let’s take a look at how you can avoid getting wrapped up in debt consolidation scams on your journey to debt freedom.
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How does debt consolidation work?
Debt consolidation is one way to get all your debt in one place so that it’s more manageable. Some common debt consolidation methods include:
- Debt consolidation loan: A personal loan you use to pay off existing debt but with better terms and a fixed rate.
- Balance transfer credit card: A balance transfer card allows you to move debt from one or more credit cards onto a new one, possibly with a low promotional rate.
- Debt management plan: A certified credit counselor manages your debt payoff and may negotiate with your creditors on your behalf.
- Debt settlement: Your creditors agree to accept less than you owe on the debt. Debt settlement can negatively impact your credit, since you aren’t fulfilling your entire debt obligation.
Debt consolidation can be a good idea, depending on your situation. If it makes your debt easier to manage, you can afford the payment and it doesn’t end up costing even more in fees, debt consolidation is worth considering.
8 warning signs of a debt consolidation scam
Unfortunately, there are scammers out there waiting to take advantage of your situation and your hopes to get out of debt. You may encounter “debt consolidation companies” that are actually businesses offering debt settlement services, or shady companies that don’t offer any legitimate services, but instead seek to prey on people struggling with debt.
Here are some of the common red flags associated with debt consolidation scams.
- You’re asked for an upfront payment
- The company pressures you to act fast
- The company contacts you first with an unsolicited offer
- You’re told to cease contact with your creditors
- You’re told to stop paying your bills
- The company refuses to disclose its terms
- The company guarantees debt forgiveness or reduction
- The company claims to have access to a “special government program”
You’re asked for an upfront payment
If you’re getting legitimate financial counseling, it’s fine to pay for that service. But for-profit debt settlement companies will sometimes ask for a high fee upfront. This should be a warning sign as you haven’t received any actual assistance in reducing or settling debt.
Whether it’s a “setup fee” or some other way to charge upfront fees, watch out. No matter what the company calls it, if they’re asking for upfront payment, there’s a good chance you’re dealing with a scam.
The company pressures you to act fast
If a company pressures you into a quick decision or uses aggressive tactics to get you to sign up, you could be dealing with a scammer. Legit debt consolidation options are always available. They don’t disappear because you take some time to decide.
The company contacts you first with an unsolicited offer
An unsolicited debt consolidation offer can be a sign of a scam. There might be a phone call telling you you’re eligible to work with a debt relief company, or an email or letter. While not all unsolicited offers are scams, you should treat them with extra care. Be sure to read consumer reviews and research any company you plan to work with.
You’re told to cease contact with your creditors
In general, terminating all contact with creditors when you owe them money is an ill-advised move. If you’re struggling to make payments or are buried in fees, you should always feel free to contact your creditors to explore any potential options. Ceasing contact can lead to unpleasant surprises down the road, including the potential for legal action.
You’re told to stop paying your bills
Sometimes, a debt consolidation scammer will tell you to stop paying your bills and send a monthly payment to them instead. Scammers use this tactic to pressure your creditors into settling faster, but the most likely outcome is that your debt will be sent to collections.
The company refuses to disclose its terms
Transparency is key if you want to avoid getting scammed. Before you sign anything, ask to read the company’s terms of service before making a commitment. If a company doesn’t want to share that information, that’s a good sign that they aren’t on the up and up.
The company guarantees debt forgiveness or reduction
Scammers make big, splashy guarantees about a significant reduction in the amount of debt you owe. Claims that are too good to be true, including promises to get you out of debt for pennies on the dollar, are usually a red flag. While a third party can attempt to negotiate on your behalf, your creditors are not obligated to agree.
The company claims to have access to a “special government program”
Finally, watch out for “special” access. Companies that talk about “secret” programs and “special loopholes” are usually out just to take off with your hard-earned cash. In fact, the Federal Trade Commission (FTC) specifically warns consumers to avoid companies that make such claims.
How to avoid a debt consolidation scam
Scammers may use more than one tactic to try and get you on board. The more red flags a debt relief company waves, the faster you should head the other direction.
Here are some tips to help you avoid debt consolidation scams:
Do your research: The more you know about a company, the far less likely you’ll be scammed. Looking up their reputation with the Better Business Bureau (BBB) and checking for any complaints filed with your state’s attorney general is a great start.
Compare multiple offers: Don’t take the first offer you see. There are plenty of reputable debt consolidation loan lenders and programs. Just as you should compare prices for various products and services, you want to look at different debt consolidation offers to find one that truly works best for you.
Read the fine print: Always check to see what surprises lurk in the fine print that few people read. You might be shocked to find the real story, not just the company’s shiny guarantees.
Don’t provide payment upfront: While some reputable credit counseling agencies do come with nominal fees, you don’t usually have to pay them upfront. Stay away from any company that demands payment before they even start helping you.
Ask about fees: Find out about any fees and how they’re charged. In some cases, particularly large fees could negate any benefit you’d gain from consolidating your debt, landing you in more debt than when you started.
Get everything in writing: The cardinal rule of any agreement is to get it in writing. Whether you’re working with a debt management company or settling with your creditors directly, you need to get everything in writing so you have a record of the agreement.