Wednesday, January 20, 2010

Beware of debt consolidation schemes

As the $0-Balance Challenge goes on, I'm getting more questions from people who are committing to paying off their credit card balances and want to know the best way to go forward. Like this:
I'm in the process of eliminating my credit card debt. I don't use the cards anymore and I recently set up payment plans. I hear about these services that consolidate all your debt so you only pay one "low" amount a month. Seeing as though I'm paying off two credit cards and student loans, is something like that worth looking into or should I keep doing what I'm doing?
I'll answer your question with a slogan I saw on a bus billboard the other day. It said, "Danger. Debt consolidation could cost you your home." It was a warning about scam artists who target people in trouble with their mortgages with 'consolidation loans', but I think the DANGER message applies to ads about credit card debt consolidation every day on the sports talk station I listen to and I shudder.

Why? Because what most people don't know about these operations is that many of them are owned by the very credit card companies they claim to be helping you get out of debt with. Think about it: how else would some random company or 'nonprofit' be able to negotiate a settlement on your behalf with a behemoth bank? And that's just in the best case scenario; in the worst case, debt 'consolidators' are pure, outright scams who will take your payments and never turn over anything to a credit card issuer or worse: steal your personal information and perhaps make your credit worse.

While there are a few legitimate debt consolidators out there, the truth is most people don't need them. Unless you're buried under so much debt it's impossible for you to get out (in which consolidation wouldn't help but Chapter 7 might), you don't need a third-party to consolidate your debt. If you've already set up a payment plan with your card issuer that's affordable, stick to it and remain disciplined about not using the card any further. That pays off in the long run without the worry of being scammed.

image: - Michelle Mieklejohn

1 comment:

mr. nichols said...

this post puts everything in perspective. thanks for the information.