- Look for industry affiliations.
- Avoid unreasonably high fees.
- Understand the pros and cons of each debt consolidation approach.
It's Easy to Find a Reputable Debt Consolidation Company, Once You Know What to Look For
Before you decide which provider should help you consolidate your debt, you need to decide which debt consolidation strategy is right for you. There is no one-size-fits-all strategy, despite what you see in television ads. See the Bills.com article Debt Consolidation Program to learn about your options, and the strengths and weaknesses of each.
Shopping for debt resolution companies is somewhat difficult, because this is not a subject that surfaces in casual conversation. You may ask your friends for a referral for a doctor, lawyer, plumber, or mechanic, but it can be embarrassing to ask for a referral to a debt resolution company. For that reason, you must do your own homework when picking a debt consolidation partner.
We recommend you follow the the six steps to choosing a debt consolidation company, and watch for the five warning signs of shady companies, which are discussed below.
1. Check Employer Accreditation
Look for a service provider that is a member of an industry association. For credit counselors, look for membership in the AICCCA or the NFCC. For debt settlement, look for a membership in AFCC (formerly TASC) or IAPDA. Each of these groups do not guarantee that their members will provide good service. However, membership in an industry group probably indicates some longevity in the business, and may show the company follows industry best-practices. For example, AFCC provisional members have two years of financial results audited and are mystery shopped before becoming full members.
Learn how long the firm has been in business. A long history is good because a company with a long history will have experienced underwriters and negotiators who demonstrate an ability to negotiate with a variety of creditors effectively.
3. Check Employee Accreditation
Look for a service provider that hires employees who are themselves IAPDA members. Again, just because a person is a state-licensed doctor, lawyer, plumber is not a guarantee the person gives good customer service. However, membership in IAPDA is a sign the counselor you are speaking to takes their job seriously, has undergone training and passed a test. Given the choice between a servicer provider that is a member of industry associations and hires IAPDA or another group that trains and tests counselors, and a service provider with no industry membership, spend your time looking at the one with the memberships.
4. Counseling Session
Expect a lengthy counseling session where the provider reviews your finances and makes recommendations that best meet your needs. This may take 30 minutes or more, depending on your situation. It probably took you several years to get into your financial situation, so it will take some time for a counselor to help you find the best way out.
The service provider should set realistic expectations for you for both the positive and negative aspects of their services. You should understand the impact the service will have on your credit score, services rendered, fees, and procedures. All should be presented in a written form to you before you sign a contract. If a service provider cannot answer your questions or provide you with written documentation of procedures and policies, move on.
6. Reasonable Fees
High up-front fees for credit counseling are a warning sign. Credit counseling fees should not exceed $50 monthly. Debt settlement firms that talk to their clients on the telephone may not charge a fee until the first debt is settled.
5 Signs of Bad Debt Consolidation Companies
Now that you know what six issues to watch for, here are five signs of a bad debt consolidation company.
1. Quick-Fix Debt Consolidation Loans
The offer sounds good: with one simple loan, you can cut your monthly payment in half. The truth is much more complicated. If your finances are in really bad shape, you probably will not qualify for a decent interest rate on a loan. The loan you get may indeed have lower payments, but you will pay over a much longer term and often with 21-22% interest. In the business, these are known as "hard money" loans.
2. Mandatory Donations
Although a debt consolidation company may claim to be a non-profit, they add an additional monthly fee, often 10% or more, or a hefty up-front fee to your debt package. If you can afford that extra 10%, you are better off negotiating directly with your credit card company to lower you interest rates and adding that fee amount to your payments.
3. Stopping Payment on Your Debt Before Starting the Plan
The debt consolidation service may advise you to stop paying your debts until your plan starts, but that will only result in late fees being added to your account. Some consolidation companies are also notorious for making late payments once you are in the plan.
4. High-Pressure Sales Tactics
If a debt management plan or debt consolidation loan is right for you today, it will be right for you tomorrow. A legitimate offer does not have a 24-hour, or even 72-hour, expiration date. Take your time to choose the right solution to your debt. Do not succumb to pressure to sign up today to lock-in a great deal.
5. Big Promises, Little Delivery
Some companies make big promises to repair your credit, fix your score, and reduce your debt. The only way to repair your credit or fix your score is to get rid of your debt and wait for delinquencies to receive a lower weight in your score calculations. A debt consolidation loan will reduce your debt, but only if you make regular, on-time payments that do not include high fees. In other words, the old saying, “If it sounds too good to be true, it probably is,” applies to debt consolidation companies.
Common debt consolidation options include:
- Home equity loans
- Personal loans
- Cash-out mortgage refinancing
- Credit card counseling
- Debt management
- 401(k) loan
If you own a home, you may be able to refinance your home on your own and avoid paying any debt counseling fees.
You may feel stressed by your debt, but rushing into an agreement with a shady debt consolidation company will only make your situation worse. Consider your options carefully before you sign a contract.