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Debt Consolidators: Friend Or Foe?

With the recent recession and high unemployment, the credit card debt consolidation industry has really become a booming sector of the economy.  A debt consolidator will offer to take all of your credit debt, negotiate for lower payments and interest rates with your creditors and make you debt free in a few short years.

These promises are incredibly inviting offers to those in our society most suffering under the burden of unemployment and staggering debt.  Unfortunately, many of those caught in this trap are left deeper in debt, without legitimate alternatives and nowhere to turn for help.

Do not let this be you!!!  If you are considering using debt consolidators to consolidate loans, watch out for these traps and pitfalls.

The Bad Credit Loan

Credit card consolidation loans (the good ones) are not easy to get.  This is because you probably need a debt reduction loan because you have missed a few payments on your credit cards and your credit score has taken a major hit.

If you are a credit risk, the debt consolidator will promise easy debt settlement, and you with a bad credit loan and paying high interest rates (higher than you are paying now).  Even though your monthly payment is lower, you will pay more interest over a longer period of time.

Debt Consolidators Will Take Care of Everything

The credit consolidation company promises to make your life easier by negotiating lower interest rates and payments.  You need only make one easy monthly payment.

Look For High Hidden Fees. In reality, many debt consolidators charge a fee as a portion of the payment you make.  This fee is usually around 10%. They forward the payments to the creditors and get an additional 10% to 15% from the creditor as well.  Is it really worth paying someone else to negotiate lower interest rates, stretch out your repayment schedule and pay off the highest-interest debts first?

They Might Make Late Payments. Another trick used by debt consolidators to separate you from more of your money is to negligently or intentionally make late payments.  The creditor charges a late fee, thereby increasing the balance.  The debt consolidator then stretches the repayment out over a greater period of time and charges you more months of processing fees.

Balance Transfers Can Be A Trap

Even though 0 interest credit card offers are still commonplace, those rates only last a few months.  If you want to continue paying low interest, you have to switch cards and pay another balance transfer fee.  I admit that I used to use these balance transfers for business debt consolidation.

There are two pitfalls to using balance transfers.

First of all, you have to have a good credit score to qualify.  Second, remember that each time you conduct a balance transfer for credit consolidation, the activity shows up on your credit report.  If you are unable to transfer the balance at the end of the initial term, you could be left with a high interest credit card and a large balance.

Just because you have made a few bad credit moves does not mean that you have to continue down that same path. Avoid quick fixes to your credit problems.  If you get into trouble, in most cases you can call the creditor and negotiate a better repayment plan, avoid unnecessary fees as well as the balance transfer trap.  You can do anything that a debt consolidator can do.

After all, I think it was Paul Harvey who once said that:

“No man can become debt free by making another loan.”

I agree.

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