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The Truth about Debt Consolidation

If you are overwhelmed by debt, the most important thing you need to remember is never try to ignore the problem. Ignoring the problem will not make it go away. In fact, it will make it much worse, because fees will continue to accumulate and your interest rate will most likely increase. Your late payments or failure to pay will also be listed on your credit report, so speak to your creditors and see if they are willing to set up payment arrangements.

You have probably heard a lot about debt consolidation companies and may have considered hiring one to assist you in straightening out your finances. Since these companies are able to negotiate with creditors to put a stop to late fees, over limit fees, annual fees, and increases in interest --and are often able to persuade the creditor to lower the interest rate and the amount of your monthly payment-- you should attempt to convince your creditors to negotiate with you in the same way. Some creditors will work with you, realizing that they will be able to collect at least some of the money you owe them by doing so.

If you are intimidated by your creditors and are uncomfortable approaching them yourself, you might want to work with a debt consolidation company. If so, you will be asked for your current account numbers and balances. After negotiating with your creditors, the debt consolidation company will set up a payment plan. You will send the company one monthly payment, which must be paid on time each month to remain in the program, and the agency will disburse your money to your various creditors.

This sounds pretty convenient. Debt consolidation can be a wonderful tool that can help you change your life. By consolidating your debts into one payment, which is usually less than what you are currently expected to pay, paying down debt can become more manageable. But, proceed with caution.

Unfortunately, there is always somebody ready to take advantage of people, especially when they are vulnerable. Debt consolidation may sound like the miracle you have been waiting for, but many so-called “non-profit” debt consolidation companies promise you the moon. Few do what they promise and most are not free as claimed. Many charge a sign up fee (which is usually the same amount as the total of your monthly payment) as well as a few dollars per month for every account you list with them. This can add up if you have several accounts.

They also promise to ward off third party collectors, but often times they have no control over this practice. If your creditor decides to hire a collection agency or sell your account to another company, the debt consolidation program probably cannot stop it.

If you've ever been at the mercy of a collection agency, you probably know that these agencies are typically not very gracious about working with you. You may not realize that the person on the other end of the phone is motivated by earning a commission for every dollar he or she can persuade you to pay.

Companies that buy loans and accounts are usually not anxious to work with debtors either. A third party that purchases your account may not agree to the contract you made with the original creditor via the debt consolidation company and may raise your interest rate, add its own fees, require a lump sum before continuing payment arrangements, and raise the amount of your monthly payments. They may even demand that the entire amount you owe be paid immediately.

To add insult to injury, the debt consolidation company may not even inform you that any of this has taken place. You might not learn of this situation until you end up being contacted by the third party’s collection department or their attorney. If you can't afford to pay them off (which most people in this situation can't) or you can't come up with a large lump sum, or you are unable to pay the increased monthly payment, you will soon learn how bad things can get.

Even if you continue making the minimum monthly payments arranged by the debt consolidation company, the third party may charge you a late fee because you did not pay the lump sum or the increased amount. This is where it really gets ugly, because before long, the balance you owe will go up instead of down, even though you are making monthly payments!

Knowing these things, if you still believe that debt consolidation is right for you, be sure to check out a company thoroughly before signing up with them. Check with the Better Business Bureau to see if there are complaints against the company. You can also type the company’s name into a search engine online and review information and reviews regarding their practices.

In some cases, you will see companies that have been sued or that are facing class action lawsuits. Also, be sure the company you choose is not one whose name was tainted but simply changed its name then "restructured" and went back to business as usual under a new name.

Do not misunderstand. These warnings are intended as friendly advice, offered to help you make sure you choose a reputable company. This is not to say that there are no legitimate debt consolidation or credit counseling services available, but legitimate agencies do not promise you the moon. They tell you that you will have to work hard to straighten out your debt problems, and they also offer tips and advice. Their help is truly free if they say it's free, and they usually use words like credit counseling instead of debt consolidation. Again, it is a good idea to check with the Better Business Bureau before utilizing any debt or credit assistance company.

You may want to take out a debt consolidation loan instead of making payments through a company. This way, you can pay off your creditors and make one payment to the lender each month. Because you credit is not at it's best, you will be charged a higher rate of interest. Shop around and find the best deal, one that offers a lower rate and the fewest fees.

While trying to repair your debt, it is a good idea to avoid credit card spending. You might want to keep one low interest card that doesn't incorporate a lot of fees handy for emergencies, but other than that, you should probably close your other accounts. Instead, obtain a debit card from your bank. Using a debit card is a good way to get in the habit of only spending money you actually have.

Good luck and remember, once your debt is paid off, avoid falling into the same spending traps or you'll be right back where you started.

This article was written by Sherry Holetzky.