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How to spot a debt consolidation scam

How to spot a debt consolidation scam

By: Diana Bocco | 15th May 2020

While most debt consolidation companies adhere to fair practices, there are firms out there that prey on people desperate to get their finances under control. Falling for a debt consolidation scam can put you farther in debt and cause additional problems down the line.

Debt consolidation is a somewhat simple process. It basically combines all your debts and pays them off using a single new loan. Although this can be useful for many people looking to start fresh, you also have to watch out for scams by disreputable companies.

Before you let somebody deal with your debts, make sure you carefully review any documents you have to sign. Look at the payment schedule and how your instalments are handled. Does your money go directly towards the loan principal or will you be paying interest first? This can make a big difference on how much you’ll end up paying back in the end. 

Here are four red flags that might indicate you’re facing a debt consolidation scam:

A guarantee to eliminate all your debt

Debt consolidation gets you into a new debt in order to pay off your old ones. That alone means you won’t be debt-free right away, so anybody promising that is lying. The ultimate goal of debt consolidation is to help you lower your monthly interest and payments. At the end of the day, however, you will still owe the same amount you did before. The only difference is that you will owe it to just one creditor rather than many. 

You should also be wary of one-size-fits-all debt repayment plans. You want a company that will sit with you and evaluate your unique situation. A promise of “we can erase your debt” before anybody even looks at your numbers should make you suspicious.

The company charges upfront fees

Another way to spot a debt consolidation scam is to look at how a company charges you for their services. Debt repayment companies usually work on a percentage basis. StepChange Debt Charity, which offers credit counselling and debt repayment advice, estimates that the average company charges around 17% of your monthly instalment. This means that before a company can settle on a price, they will have to calculate your total debt and your monthly payments. Only after that they can tell you the amount you will pay every month as their fee.

If the company you’re talking to is asking for an upfront fee, that’s a red flag. These fees can sometimes be labelled as processing fees, handling fees, or account setting fees by the company. But no matter what they’re called, insist on working on a percentage-based fee or walk away. 

They promise to improve your poor credit score right away

Another easy way to identify a debt consolidation scam is to look out for big promises. While paying off debt is an important step towards repairing your credit, this won’t happen overnight. It won’t happen over a period of days or even weeks either. That’s because paying old debts is only part of improving your credit score.

Another important factor in your credit score is showing that you can pay your bills on time. Even after settling the old debt, you still have to pay new monthly bills on time for a while before you’ll see a change in your credit report.

They advise you to stop interacting with creditors

There’s absolutely no reason for you to stop contacting your creditors and debt collectors once you consolidate your debt. In fact, it makes sense to call creditors to confirm they received payments and things are in order. If you had debts in collection, a quick phone call or email to confirm the debt has been settled isn’t a bad thing either.

You can spot a debt consolidation scam by the way a company tells you to deal with it. They might recommend to leave things alone, but if you choose to communicate with debtors, they should offer guidance. A refusal to let you be part of the process could be a sign of financial fraud.

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