Have you received a low-interest rate loan offer in your mailbox offering you a 3% to 4% interest rate to pay off your credit card debt? Did the loan offer say you are pre-approved? Did the loan offer provide you with a “personal invitation code” or a “personal reservation code”? Is your credit less than perfect? Does the loan offer seem too good to be true?

If any of the above sounds familiar, chances are you have been targeted in a bait and switch debt consolidation scam that has been around for decades. The bad actors change but the scam remains the same.

Are there any legitimate debt consolidation companies out there?  The answer is yes but we’ll get to that later.

How Does The Debt Consolidation Scam Work?

They lure you in with a low-interest rate loan that seems too good to be true. You call the toll-free number on the mailer and speak to a slick-talking salesman that promises to take care of all your financial problems. You give them your social security number and date of birth so they can qualify you for their “special loan program.”

A day or two goes by and you get a phone call that you don’t qualify for a loan but you are approved for some sort of debt relief program that is much more expensive. You may be referred to an outside attorney. You are sold on how this is the better option for you and your only other alternative is bankruptcy.

You are confused. You are nervous. You are worried that you may even be a potential victim of identity theft. 

You Search The Internet For Reviews

You start doing your homework. You google for reviews on the company. You search PissedConsumer.com. You start finding complaints. You start reading stories about others in the same situation as you. 

What do you do now?  Who can you trust? Are there any legitimate debt consolidation companies out there that will work with you, even if you have bad credit, and help you get out of debt?

The answer is yes but it is important for you to understand more about debt consolidation so you can make an informed decision.

Consolidating Credit Card Debt

You can get debt under control, but you’ll need to formulate the right strategy first. Debt consolidation can be a catalyst for this process. With this approach, you’ll roll multiple debt balances into a single monthly payment. You would take out a new line of credit or a new loan, and then use this to pay off your debts. You then focus on managing and repaying a single balance.

Not only will you no longer need to juggle creditors, but you’ll also find you might even get more favorable terms. This is where the real benefit of debt consolidation will be felt. You’ll make your monthly payment more manageable, or you could use this opportunity to pay the debt off quicker.

Is Debt Consolidation Always a Good Idea?

Debt consolidation might sound appealing if you’re feeling overwhelmed by your outstanding credit card balances. Before diving in, though, you should understand that debt consolidation is not a universal solution. This approach works best as part of a longer-term financial plan. You’ll need to give the issue some serious thought before you decide whether it would work for you.

Ask yourself the following questions:

  • Are you fully committed to changing your behavior?  You should spend less than you earn, stop charging anything to your credit card and commit to a savings scheme
  • Is your income sufficient to pay off your consolidated debt within 5 years?
  • Does your total amount of credit card debt come to half your gross income or less?

If you answered “Yes” here, debt consolidation might be a sensible option for managing and repaying your credit card debt. If you’re unsure, it probably isn’t the right fit.

Debt consolidation is highly effective if you stop doing the things that caused you to accumulate the debt. You’ll need to make some lifestyle changes to achieve your financial goals. If not, you could end up moving the problem rather than solving it.

Debt consolidation plan

Credit Card Debt Consolidation: Getting Started

The best way to get started is to consolidate debt onto a credit card with a low introductory rate of 0% APR. This will give you a chance to pay down your balance without interest getting in the way. This offer will come to an end, so it’s crucial to have a fixed repayment plan in place before you initiate the balance transfer. This will allow you to maximize the benefit of the interest-free period.

How Does Your Credit Score Affect Debt Consolidation?

When you’re looking for credit cards, you’ll need a good credit score.

Here are some simple ways to improve a flagging score:

  • Make all payments in full and on time and in full.
  • Do not open many new accounts at one time, and don’t close multiple accounts either.
  • Cut down on the number of hard inquiries on your credit report.
  • Pull your report and look for any errors.

How to Consolidate Credit Card Debt With Loans?

If you have above-average credit, you may qualify for a debt consolidation loan. This will attract a higher rate of interest than the majority of balance transfer cards, but you’ll get the chance to pay off your balance over a fixed term. If you don’t like the idea of another revolving line of credit, and you want the security of a guaranteed payoff date, this could be a good solution.

The process works similarly to a balance transfer credit card. You apply for a personal loan or an installment loan for an amount high enough to service your credit card debt. If approved, the lender buys the debt and places it on your loan. This should be at a much lower rate of interest.

Debt consolidation loans from credit unions are an alternative if you don’t fancy this approach. Credit unions are usually flexible and work with more people than banks. You could also consider peer-to-peer lending for the consolidation of credit card debt. This is an attractive option if you can’t qualify for a regular loan at a traditional bank. These loans often have low rates of interest and favorable terms, so they’re well worth exploring.

Can Debt Consolidation Affect Your Credit Score?

Your FICO score is based on 5 components:

  • Payment history: 35%
  • The amount owed: 30%
  • Length of credit history: 15%
  • Credit mix: 10%
  • New credit: 10%

Debt consolidation can affect your credit in various ways, both good and bad.

When you apply for a personal loan or credit card for debt consolidation, this registers as a hard inquiry on your credit report. Too many of these can impair your score with each inquiry causing your score to fall by 5 points or so.

Also crucial is your credit utilization ratio. This is the relationship between your available credit and the amount of credit in use. Keep this at 30% or below.

By opening a new line of credit or a new loan, this could help you to reduce your utilization ratio, providing you don’t close any cards.

How About a Debt Relief Agency?

If you’re unable to get approval for a balance transfer credit card or a loan, it could be time to look into whether a debt relief agency or maybe even bankruptcy might be a smoother fit. Both of these are avenues of last resort, and you should move slowly.

A debt relief agency will negotiate with creditors on your behalf. The aim is to get a lower rate of interest on outstanding unsecured debt. Sometimes, they could even get your total balance reduced. Unfortunately, this is an industry filled with companies using questionable tactics. There are some good agencies out there but finding one can be tough.

Make sure you fully research the agency, the costs, how the agency will make payments, and – perhaps most importantly – look at plenty of customer reviews. If you encounter lots of complaints and bad reviews on the web, look elsewhere.

Most agencies will insist you close any credit cards they’re helping you to pay off. This could temporarily damage your credit score. An agency will also charge a fee calculated as a percentage of the debt being consolidated.

Pursuing bankruptcy will also involve legal fees and will pummel your credit score for several years. It takes 7 years to fully rebuild your credit after bankruptcy.

Debt Consolidation Is Useless Without a Plan

Work out a budget so you can better understand your income and expenses. Review your spending and write down your future goals. If you’re considering debt consolidation, all that counts is finding a plan that works and then committing to it completely. Avoid taking on any new debt, too, as this will just slow you down.

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  1. While every effort has been made to ensure the accuracy of this publication, it is not intended to provide any legal, medical, accounting, investment or any other professional advice as individual cases may vary and should be discussed with a corresponding expert and/or an attorney.
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