How Can I Determine if a Debt Consolidation Service is Legitimate?

Q: How can I determine if a debt consolidation service is legitimate?

A: In a debt consolidation scam, an alleged debt consolidation service will reach out to an individual with an offer to consolidate all debt into one low-interest loan. But, after fees and information are collected, the “company” vanishes and never fulfills its promise of moving the debt. 

Debt consolidation scams can be difficult to spot, so it’s a good idea to learn how to recognize the red flags. Here’s how to determine if a debt consolidation service is legit. 

1. Check accreditation and licenses

Legitimate debt consolidation companies should be accredited by recognized organizations like the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). These organizations set strict ethical guidelines for member companies. Also, many states require debt consolidation services to hold a license to operate. You can verify a company’s legitimacy by checking with your state’s regulatory body.

2. Research the company

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 signal to avoid them.

3. Understand the fees and costs

Legitimate debt consolidation services should be transparent about their fees. If a company is vague or hesitant to detail costs upfront, this is a big-time 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 wanting payment before doing anything. This is often a telltale sign of a 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 terms. Before signing up, 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 actually do that in the long run.

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 legit company can promise to remove your debt entirely without repayment or to erase it from your credit history instantaneously.

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 ensures you don’t fall back into financial trouble later. 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

A third-party professional who is not tied to the debt consolidation company can help you review the terms and ensure 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 warning signs:

• 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. 

Stay alert and stay safe!