Are Debt Consolidation Companies Worthwhile?

Debt consolidation has helped many people get to a better place financially. So yes, looking to work with a debt consolidation company absolutely can be worthwhile if the circumstances fit — provided you also take note of certain red flags.

What Is Debt Consolidation, And Why Do It?

Debt consolidation is a way consumers can manage debt by combining various lines of credit into a new loan. While the idea of a “Frankenstein loan” over their head might sound scary at first, it can be preferable to having many smaller lines of credit.

Here are some of the things that can make consolidation an attractive option:

• You only have to worry about making one payment each month. This simplifies the repayment process, as you don’t have to worry about missing any bills.
• You can lower your interest rate by consolidating debt. Debt consolidation works for many kinds of higher interest loans, such as credit cards, student loans, medical bills, and personal loans. You can often lower your net interest rate when you consolidate.
• You can potentially improve your credit score. Payment history and credit utilization are the two biggest factors determining your credit score. Paying your consolidation loan on-time every month — effectively lowering your credit utilization — will eventually boost your credit ranking.

There Are Legitimate Debt Consolidation Companies

Based on the previous section, it’s clear there are scenarios where debt consolidation is a worthwhile endeavor. Credit card balance transfers, debt management plans, and consolidated loans from respectable organizations can all help you beat debt.

It’s important, however, you look at top-rated debt consolidation companies if you’re going to consider this route. Not all organizations offering consolidation services are the same. Some are more about trying to take advantage of consumers than helping them beat their debt.

Know the Red Flags

Certain red flags can help you spot a bad debt consolidation company from a mile away. If you come across an organization that operates under any of these principles, it’s best to just turn around and look somewhere else.

Here’s what to look for:

• The company guarantees you’ll get out of debt. Absolutely no one can make this promise to you. There’s no guarantee for success with debt consolidation because you still have to go through the work of paying down the loan. Anyone telling you otherwise isn’t being honest.
• They ask you for payments before providing you services. Some forms of consolidation might charge transfer fees, but you shouldn’t be charged anything until after they’ve provided you a real service related to consolidation.
• It’s difficult to understand what you’re really signing up for. Don’t work with any company offering consolidation that is being shady or not answering all your questions. Some organizations market themselves as debt consolidation, but actually provide settlement services once people have signed up. This is a vastly different process. Only work with a company if they’re open about all of the details about your consolidation.

So yes, debt consolidation companies can be worthwhile. However, if something feels wrong when you’re considering one, look for another group with which to work. There are enough of them out there that you can find an honest organization. Speaking to a credit counselor can help put you on the path to finding a good consolidation company for your needs.