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What Do Debt Consolidation Services Offer?

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I see these advertisements all the time on television and in magazines promising to lower your monthly payments, help you get out of debt, and basically solve all of your life’s problems. If it really were as easy as making a simple phone call, why can’t you do it yourself and what exactly do these debt consolidation services offer? The inner skeptic in all of us is always wary of promises like those offered by debt consolidation services because they sound too easy and too painless when we know the actual fight out of debt is neither.

Please don’t confuse debt consolidation services with credit repair services. Credit repair services are all scams. If you have an error in your credit report, go to the reporting agency and let them know and they will fix it for free. If you were just irresponsible in the past, you will have to mend your ways and time will heal your credit.

The Debt Consolidation Process:
This is what happens when you work with a debt consolidation service. You sign up with them and enter into a negotiation period in which the service contacts all your creditors and tries to lower the amount you owe or the monthly payments. During this time, since you’re not paying, the creditors will still be calling you. Then the debt consolidation service hooks you up with a loan referral company, which becomes the only company you send money to, who will take your payment and disperse it amongst your creditors. The first and possibly second payment goes towards fees and other incidentals (such as the fees for the debt consolidation loan mentioned later, credit report, etc.), not towards any of your debt! Once you make multiple on-time payments to the loan referral company, they consolidate your outstanding debt and they become your single creditor. All throughout, you can expect double digit interest rates on your loan.

Sounds great right? Well, you may or may not have known NCN just paid off over ten thousand dollars in credit card debt in less than a year’s time and I wanted to know his opinion of these services and this is what he had to say:

Jim,
I never considered using a debt consolidation company. Here are the reasons why.
1. I wanted to be in total control of my money.
2. I wanted the success (or failure) to rest with the decisions that I made.
3. I have heard that using a debt consolidation service reflects negatively on your credit report. I have never looked into this, but Dave Ramsey mentions this several times a week on his radio program. Good enough for me.
4. Why do I want to pay MORE money for the privilege of having some company do the work that I should be doing for myself? I can call and get lower rates, I can schedule extra payments, I can negotiate.
5. Quite frankly, most debt consolidation services strike me as “slimy”. Just my opinion.

There you have it. The one person I know of that would’ve benefited from a debt consolidation service stayed away because he could do it all himself (and you can too).

If you’re considering a debt consolidation service, I suggest popping over to No Credit Needed (NCN’s blog), reading his stuff, and fire off an email to him. He’s a very friendly guy and always seems willing to give you a well thought out answer to your question. If you’re interested, he also has a podcast that I’ve enjoyed from time to time.

{ 6 comments, please add your thoughts now! }

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6 Responses to “What Do Debt Consolidation Services Offer?”

  1. ncnblog says:

    I feel famous… I have been quoted! Awesome baby! Dork!

    Re-reading an email you sent always feels like listening to your own voice on an answering machine…very, very wierd.

    ncn

  2. jim says:

    You should be used to it, you do publish a podcast. :) Just wait until Scott from Money Blogger Podcast comes knocking to do an interview. Hearing yourself in a podcast on someone else’s site answering questions… you’ll really feel awkward.

  3. Miller says:

    I can see how this would be worth it if your credit card companies are taking you for 30% or something ridiculous. A 10-20% loan sucks, but it’s better than that! Isn’t that the type of situation debt consolidation companies are aimed toward?

  4. Michael says:

    I had a completely different experience when I used CCCS from 1999-2002. Before then, I had a fatal combination of being poor and stupid. I racked up about $18,000 in credit card debt after college and was only paying the minimum payment about 90% of the time. I met with a rep at CCCS who, while I was there, called the 4 different CC companies and negotiated with them. I ended up getting 0% interest on two of them and the other two were lowered from around 13-14% to 6%. CCCS looked at my budget and saw that I had no money to cover their fees, so they didn’t ask for any. All I had to do was promise that I wouldn’t take out any more CCs during the 4-year plan No problem there. There was no other loan company involved. CCCS auto-withdrew the same amount every month, and I would get a statement showing where they had applied it.

    Four years later, I was completely debt-free, and in the 4 years since then, I’ve had a CC balance for all of 2 months (wedding costs). Nothing was reported on my credit reports, and two years ago my credit score was 760.

    I’m sure there are some scams out there and even with the good ones, they might not work for everyone. But for me, it was a lifesaver and a turning point.

  5. Matt says:

    I’ve known some people for whom such services are a viable and reasonable option. When bill collectors are hounding you around the clock, to the point where you’re seriously contemplating suicide as a solution, your interest rates and fees and penalties are crippling your budget, and even without taking more credit out you’re still falling further in debt every month, even paying debt-consolidation fees and 20% interest (which, in situations like that, is typically a lower rate than you’re already saddled with) can be a bargain.

    It’s better for your credit than Chapter 7. And it’s better for your friends and family than putting a gun to your head. If those are the only alternatives you can see, then debt consolidation is a good deal for you. And yeah…like I said, I’ve known people in that position. I’ve been within 3 weeks of that position myself.

    It’s definitely not for everybody. If your situation isn’t desperate, if there’s any way you can get out from under your debt on your own power, then this probably isn’t for you.

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