Carrying a heavy debt load may limit your financial options, drain resources in interest payments, and make you cringe when you get another FINAL NOTICE warning. Many people with debt turn to credit consolidation services – companies that help you work your way out of debt. Are these debt management companies a good solution for you?
Maybe, but take a look at your spending habits and the services provided by the debt consolidation company before signing up for services that may not be the best option for you. Here are some things to consider:
1. A debt consolidation service won’t work if you don’t change your spending habits. Debt consolidation services can lower your monthly payments, but if you don’t change your spending habits, you may soon find yourself even deeper in debt as you free up more credit. US News estimates that 70 percent of consumers who sign up with debt consolidation services find themselves with as much, and even more, debt than they previously carried.1 It’s up to you to manage debt. A debt consolidation service can only do so much.
2. Choose an accredited debt consolidation service. Several organizations accredit debt consolidation services, including the Council on Accreditation of Services for Families and Children, Inc. and the Association of Independent Consumer Credit Counseling Agencies.
Ask if the debt consolidation company is accredited. The Federal Trade Commission (FTC) also recommends that you check your state attorney general’s website, and any state consumer protection agencies available.2 In Nevada, debt consolidation companies are required to register with the Nevada Division of Financial Institutions. To find out if a particular company is registered, visit their website: http://fid.state.nv.us/ and choose “Licensee Search” from the menu on the main page.
3. Avoid commission-based debt consolidation services. If the company you’re considering to help you manage debt operates on a commission-based fee schedule, there’s the temptation that the company will try to sell you services you don’t need. When you contact a debt consolidation company, information on services and fees should be clear and reasonable. Service fees should be set in writing so you know: (1) what services the company will provide; and (2) what it’s going to cost you to obtain those services.
4. Shop around for the best deal. Some debt consolidation companies charge high fees for debt reduction steps you can take yourself, like contacting companies you owe to work out a payment plan. Choose an accredited, registered company that asks questions about your situation before trying to sell you one of its debt consolidation service plans. Also, debt management advice and counseling should come as part of your service fee.
5. Learn basic money management skills. A reputable debt consolidation company wants to help you eliminate or control your debt. Some companies offer financial counseling, financial planning, budgeting advice, and other valuable information you can implement yourself.
6. Read the fine print. Most debt consolidation companies provide a contract that details services and costs. Read the contract carefully for hidden fees, early account closure penalties, and other costs buried deep in the fine print. Accredited, registered agencies will be happy to review each clause of the contract. Ask for help when you don’t understand any of that fine, fine print.
7. Calculate the additional cost of debt consolidation. These companies may often work out payment plans on your behalf, and indeed, lower monthly payments. However, your debt load remains the same. Payments are simply spread out longer, often costing you more in interest over the long term. Before you sign an agreement with a debt consolidation company, determine, not only fees, but what you’ll pay in additional interest to stretch out your payments. A reputable debt consolidation company will be glad to assist you in calculating total costs before you sign a contract.
Debt consolidation companies, and debt consolidation loans, can be useful tools for individuals carrying heavy debt loads – often through no fault of their own. One unexpected medical bill can have you under water in no time. But do your research. Call around to see how each company approaches you. And be sure you know exactly what you’re signing before handing off your debt for professional management.
Is a debt consolidation company right for your situation? You owe it to yourself to find out.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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