Think Twice Before Debt Consolidation

With total credit card debt on the rise, individual consumers are increasingly finding themselves strapped with oppressive debt balances. Some of these borrowers are falling prey to so-called debt consolidators who promise quick and easy debt elimination.

In the board game Monopoly, sometimes you need only to land on the Free Parking jackpot to get out of debt fast. In life, it's not that easy-despite what you might hear from advertisements and fast-talking debt consolidators.

Debt consolidation is an industry that's prone to consumer abuse. Unfortunately, unscrupulous service providers know that desperation makes for an easy target. Excessive credit card debt has a way of making borrowers feel desperate, particularly when those balances keep growing from monthly interest, rising rates, and repeated late fees. These borrowers are usually ready to listen when someone starts promising a quick fix, and an easy way out of debt. The unlucky ones get lured into spending more and solving nothing.

Warning signs

Anyone considering debt consolidation should tread lightly. Getting ripped off at this stage of the game is an awful blow, but one that can be avoided. First, be suspicious of claims that sound too good to be true. Your debt can't be wiped away immediately, nor can you pay it off with an excessively small monthly payment. It took a long time for your credit score to get to where it is today; it can't be increased quickly. And creditors are not likely to reduce your interest rate to zero. Service providers who say that they can accomplish these things are only serving their own greed.

Ethical debt consolidators should be offering some type of credit counseling or budgeting help as part of their services. Spending control is a fundamental piece of getting out of debt; a consolidator who fails to tell you this is not acting responsibly.

Protect yourself

Do a background check, and read your contract carefully before placing your signature on any document. Look up prospective debt consolidators with the Better Business Bureau. Ask if the business belongs to the Chamber of Commerce or another business organization, and then verify those memberships on your own. You can also ask for verifiable referrals from former customers.

Remember, no one works for free. Debt consolidators charge fees for their services, but they do a great job of hiding these fees within your debt repayment plan. Some consolidators may charge you by adding an amount to your monthly payment, or by pocketing several months' worth of payments. Find out exactly how much you have to pay, and how those fees are collected. Then, ask to see the exact wording in the contract that describes those fees. Review the contract carefully until you understand everything. If the fees are excessive, you're better off giving that money directly to your creditors.

In short, be wary of slick talkers who promise a "Get Out of Debt Free" card. Bankruptcy is the only way to wipe away debt, and that's something you'd rather avoid.