Finding A Debt Consolidation Company: The Devil's in the Details

Credit card bills and other expenses have a nasty way of adding up, and we know that what goes up eventually comes crashing down. When your bills are no longer manageable, a debt consolidation company or credit counseling agency may help. Here's how to find a company that can help you consolidate debt and develop a workable budget.

Debt Consolidation Company and Credit Counseling Agency: What They Do

Credit counseling agencies and debt consolidation companies typically work in similar ways. They assist consumers by negotiating repayment with lower interest rates and late fees in exchange for an administrative fee. Your debt consolidation counselor will work out a repayment plan with creditors based on your ability to pay and what your creditors are willing to accept. Once an agreement is made, you pay your credit counseling agency or debt consolidation company and they distribute payment to each of your creditors. You should receive monthly statements from your debt consolidation organization in addition to statements from your creditors.

The terms credit counseling agency and debt consolidation company are interchangeable, but each company has its own requirements and administrative policies. Organizations affiliated with the National Foundation for Credit Counseling (NFCC) operate by standards that emphasize getting and keeping clients out of debt. In addition to developing a repayment plan with your creditors, NFCC credit counseling and debt consolidation agencies will typically review your income and current budget to help you develop a cash-based budget and build savings.

If you need help with making mortgage payments, the U.S. Department of Housing and Urban Development (HUD) approves credit and housing counseling agencies for assisting clients with housing related matters including buying a home and how to avoid foreclosure. HUD-approved Housing counseling agencies may also offer debt consolidation and credit counseling services.

Debt Consolidation Programs: The Devil's in the Details!

Credit counseling and debt consolidation organizations act as intermediaries between consumers and their creditors. As with any type of negotiations, there are trade offs on both sides. You can expect to share your credit reports, income and expenses with your credit or debt consolidation counselor. You may be required to complete educational sessions on budgeting and household finances. Your creditors may agree to reduce interest rates and fees, but will almost certainly require you to close credit card and unsecured loan accounts. Some programs may allow you to keep one card open, but this depends on program and creditor policies.

When searching for a debt consolidation company, it's important to shop and compare services offered. Debt repayment programs can last for a few years, so you'll want to find a credit counseling or debt consolidation agency that can meet your needs and answer your questions. Here are a few tips for finding a debt consolidation program:

  • Nonprofit doesn't mean free: The Federal Trade Commission cautions consumers that credit counseling and debt consolidation services may operate as nonprofits, but this doesn't mean their services are free. Always request written quotes so you can compare costs.
  • Watch out for unsolicited offers of help: If your home is in foreclosure, you may receive unsolicited offers of help. This can lead to scammers taking advantage of your situation rather than offering legitimate help. Reach out to credit counseling agencies for help. You're under no obligation until you sign an agreement.
  • Get it in writing: Debt consolidation and credit counseling agencies have different fee structures and administrative policies. Don't sign anything until you have read and fully understand how a debt consolidation program works, how much and how often you'll make payments.
  • Compare fees and costs: Beware of an organization that charges a fee for an initial consultation or that charges excessive fees. If you aren't comfortable with a provider's fee structure, move on to another debt consolidation service.

Debt consolidation and credit counseling companies cannot "erase" derogatory items such as late payments from your credit report, and they cannot guarantee that you'll qualify for new credit after completing a debt consolidation program. Using common sense and following your instincts can help you avoid problems. If something sounds too good to be true, it probably is.

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