How Does Debt Consolidation Work?

As more and more people are looking at ways to get out of financial trouble, they’re turning to debt consolidation companies for assistance.  The problem with this may be that the company you hook up with may do you more harm that good.

Not all debt consolidation companies are fake.  Those that are, however, will cost you a lot of money, although still less than what you’d owe your creditors, but they will kill your credit rating, while collecting upfront fees of at least $500 or more, or asking for a percentage of your debt, which could be anywhere between 10% and 15%.

So, what do these companies do for, or to you?  They start out by telling you to stop paying all credit card bills, and to give the money to them.  You believe they’re actually paying your bills for you, even though you keep getting statements that look worse and worse, which may eventually turn into collection letters.

What’s going on is that they want to hurt your credit rating.  Why?  Because a person with a bad credit rating isn’t expected to be able to pay their bills in full.  So, what these debt consolidation companies will do, usually within a year to two years, is then contact all your creditors and offer to make payments to them at either half the amount owed or less.  Creditors often accept these payments because at least they’re getting something back, even though they’ve charged off the amounts and already gotten some kind of money back.

Then the debt consolidation makes the payment, and takes a percentage of the savings, and move on to the next creditor.  When they’re done, all your bills will be paid, and you might get some money back, but the company will have earned more money than you would have known about, plus got to use your money and earn interest on it.

One other problem with this deal is that not all debt consolidation companies confirm with these creditors that you’ll get a letter stating that your payment is considered as being in full, nor ask them to contact the credit agencies on your behalf stating the same thing.  This in turn will keep your credit score and credit report looking pretty bad for at least seven years.

If you’re thinking about checking into debt consolidation companies, do some research online to see if people have written negative reports about them.  You could end up saving yourself a lot of grief.