Q&A: How Can I Determine if a Debt Consolidation Service is Legitimate?
Q: I’m looking for a way to consolidate my debt, and I’m worried about scams from illegitimate debt consolidation companies. How can I determine if a debt consolidation service is legitimate?
A: In these scams, an alleged debt consolidation service will reach out to an individual and offer to consolidate their debt into one low-interest loan. However, after fees and information are collected, the “company” will fail to move the debt and is never heard from again. In the worst cases, they may use the information they received to scam the victim further and empty their accounts.
Debt consolidation scams can be difficult to spot, so it’s a good idea to learn how to recognize their warning signs. Here’s how to determine if a debt consolidation service is legitimate.
1. Check accreditation and licenses
Legitimate debt consolidation companies should be accredited by recognized organizations like the National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA). These organizations set strict ethical guidelines for member companies. Additionally, many states require debt consolidation services to hold a valid license to operate. You can verify a company’s legitimacy by checking with your state’s regulatory body.
Companies that lack accreditation, or cannot/will not provide proof of proper licensing, should raise a red flag. If they claim that licenses are unnecessary for their type of service or seem evasive about these details, you may be looking at a scam.
2. Research the company’s reputation
Next, you’ll want to thoroughly research the company by checking reviews from previous clients. You can also look up the company on sites like the Better Business Bureau (BBB) and Trustpilot for honest customer feedback and ratings. If you notice a pattern of complaints, especially regarding shady business practices, take it as a clear signal to avoid that company.
It’s also a good idea to find out how the company resolves complaints. Reputable companies will have systems in place to address and resolve issues in a professional manner, demonstrating their commitment to customer satisfaction.
3. Understand the fees and costs
Legitimate debt consolidation services should be transparent about their fees. If a company is vague or hesitant to disclose costs upfront, this is a significant warning sign. Typical fees can include origination fees for setting up the loan or service, and some may charge a percentage of the debt amount. However, any high and unexplainable fees should be considered a red flag.
4. Be wary of upfront fees
Be cautious of any service that asks for payment before they’ve done anything to help you. This is often a telltale sign of any scam. Genuine debt consolidation services usually take their fee from the amount saved or through regular payments once the debt restructuring or consolidation is in progress.
5. Evaluate the terms and interest rates
A legitimate debt consolidation service will offer clear and reasonable loan terms. Before signing up, carefully review the proposed interest rates and compare them to your existing debts. While the purpose of debt consolidation is to lower your overall interest rate, some companies may offer terms that don’t financially benefit you in the long run.
For example, if the interest rate is higher than the weighted average of your current debts, or if the loan period is significantly extended (meaning you’ll pay more in interest over time), this probably is not the best option for you. Always make sure that the terms work in your favor and that the company doesn’t pressure you into signing anything before you fully understand the contract.
6. Avoid companies with claims that sound too good to be true
One major sign of a debt consolidation scam is a company that makes outrageous promises. If a service claims it can “erase your debt overnight” or “guarantee results,” proceed with caution. No legitimate company can promise to remove your debt entirely without repayment or to erase it from your credit history instantaneously.
A genuine service will work with you to find manageable solutions based on your unique situation, but it won’t make outlandish guarantees. Be particularly wary of companies that use high-pressure sales tactics or try to rush you into making decisions.
7. Ask about their debt counseling services
Many legitimate debt consolidation companies offer credit counseling services as part of their offering. These services should include educating you on managing your debt, budgeting and financial planning. This not only helps you get out of debt, but ensures you don’t fall back into financial trouble in the future. If a company isn’t interested in helping you improve your financial habits and only focuses on consolidating your debt without any long-term guidance, it’s worth reconsidering your choice.
8. Consult with a financial advisor
Before committing to any debt consolidation service, it’s a good idea to consult with a trusted financial advisor. A third-party professional who is not tied to the debt consolidation company can help you review the terms and ensure that the option you’re considering is truly in your best interest. They can also help you weigh other potential solutions, such as debt management or bankruptcy, depending on the severity of your situation.
Red flags
Before choosing a debt consolidation service, check for these red flags:
- High-pressure tactics
- Upfront fees
- Poor reviews
- Vague explanation of fees
- Outrageous claims
- Unsolicited contact
- Guaranteed approval
If you encounter any of these in a debt consolidation service, you are likely looking at a scam.
While debt consolidation can be a helpful tool in managing your finances, it’s important to take the time to thoroughly vet the service you’re considering to ensure you’re not being scammed. Stay alert and stay safe!