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Find Out If Debt Consolidation Is Right for You

Updated on July 27, 2017
Gregory DeVictor profile image

Gregory DeVictor is a financial consultant and author who has published over 100 articles and e-books on various topics of consumer finance.

The average American family has over $15,000 of credit card debt. Nearly half of these households have trouble making the minimum monthly payments, and some are using plastic to cover daily living expenses such as groceries, a tank of gas, and the morning latte. Late fees and over-the-limit fees are rising, and more and more households are missing one or more payments altogether.

If you have too much unsecured debt, now is the time to stop this destructive cycle and get the help you need from a debt relief program. This article teaches you the principles of debt consolidation, one of the most popular forms of debt reduction. You will also learn which debt consolidation companies are the best for 2016.

Christmas is the season when you buy this year’s gifts with next year’s money.

— Unknown

How many credit cards do you have? Please include joint accounts if applicable.

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Never spend money before you have it.

— Thomas Jefferson

Debt consolidation--also known as interest-rate arbitration or bill consolidation--takes your high-interest loans and credit cards and consolidates them into one, low-interest loan that you can afford. In other words, you're taking out one loan to pay off many others. Only unsecured debt--credit cards, medical bills, and personal loans--can be consolidated. You cannot consolidate mortgages, rent, utilities, cell phone and cable bills, insurance premiums, car and student loans, alimony, child support, taxes, criminal fines, or money that you have borrowed from friends and family.

Five Ways to Consolidate Debt

You can accomplish debt consolidation in five different ways:

  1. A bill consolidation loan
  2. A personal loan
  3. A home equity loan
  4. A credit card balance transfer
  5. You can also consolidate your debts without borrowing more money through an arrangement with a non-profit or for-profit consolidator.

I discuss all of these options in more detail below.

Here are the four types of debt consolidation loans:

1. Home equity loan. A loan that is taken out using the equity in your home as collateral. If you don't repay the loan as agreed, the lender can foreclose on your home.

2. Balance transfer. You pay off the balances on existing credit cards or loans by transferring them to another account that has a lower interest rate.

3. Personal loans. An unsecured loan from a bank or credit union that has fixed payments over a fixed period of time. Here is an example:

Face value of loan - $35,000

Interest rate - 12.5%

Monthly payment amount - $567.86

Number of payments - 100

4. Debt consolidation loans. Offered by banks and credit unions for the sole purpose of combining your debts. Here is an example:

Let’s say that you have $15,000 of credit card debt with an APR of 28%. Assuming that you make no additional purchases or cash advances on these cards, it will take you 28 months to become debt free if you make a fixed monthly payment of $750. You will pay $5,457.67 in interest and a grand total of $20,457.67 (principal + interest).

If you take out a debt consolidation loan at a more reasonable 12% APR and continue to make $750 monthly payments, you will get out of debt in 23 months. You will pay $1,824.88 in interest and a grand total of $16,824.88 (principle + interest). This amounts of a total savings of $3,632.79.

Here is a word of caution: If you have delinquent credit history and/or a bad credit score, you will not be able to receive the best APRs on a consolidation, personal, or home equity loan. For example, if the combined APR on your credit card debt is 23% and the best loan rate that you can receive on is 19.5%, you might want to consider another form of debt reduction such as a balance transfer.

The Fifth Way to Consolidate Debt: Working With a Consolidator

You can also consolidate your debts without borrowing more money through an arrangement with a non-profit or for-profit consolidator. This approach to debt consolidation has become very popular in recent years. Here’s how it works:

  • Creditors who participate in these programs are often willing to reduce your interest rates and waive outstanding fees such as late fees or over-the-limit fees.
  • You may be asked to participate in a debt counseling session where you will identify the root cause of your financial problems and develop a personal budget that emphasizes savings.
  • In many cases, most or all of your credit card accounts will be closed so that you can make bona fide progress on paying off your debt.
  • You will also be asked to eliminate all other forms of unsecured debt such as overdraft protection.
  • You make one monthly payment to the consolidator who distributes the funds to your creditors until they are paid in full.
  • Whether the consolidator is non-profit or for-profit, you will also pay them a monthly service charge for their services. Generally, these fees are based on the total amount of your original debt.

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If You Are Looking at Debt Consolidation, Look at the Basic Issue First

Debt consolidation will not solve your careless spending and savings habits. The only way that you will ever achieve lasting financial freedom is to apply the dynamic laws of successful money management to your daily life. These smart-money principles will help you to establish spending and savings habits that are built on solid bedrock. They are discussed in a separate article entitled “50 Smart Money Ways to Live Fiscally Fit.”

You must take full responsibility for your financial problems and admit the reasons for your mistakes. Therefore, you should not be afraid to ask yourself questions like these:

  • Have I ever tried to live within or below my means?
  • Do I look at money management as a dreaded chore?
  • Do I buy things on impulse or to impress others?
  • Do I have clothes in the closet that still have price tags on them?
  • Do I use credit cards to supplement my income?
  • Do I treat credit cards the same as cash?
  • Do I use credit cards to help pay for housing costs, utility bills, daily living expenses such as groceries, taxes, home improvements, etc.?
  • Am I constantly paying late fees on my mortgage, rent, utilities, cable bills, taxes, etc.?
  • Have I ever taken a cash advance on one credit card to pay the minimum amount due on another?
  • Am I receiving phone calls and letters from creditors and collectors about late or missed payments?
  • Would I get insulted if someone told me that I needed credit and debt counseling?
  • Do I worry a lot about debt?
  • Have I ever thought about filing for bankruptcy?

Have you ever made a late payment or missed a payment on any of your credit cards?

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No man's credit is as good as his money.

— E.W. Howe

Before Choosing, Know Your Credit Status

Your Credit Reports and Scores.

Be sure to get copies of your credit reports and scores regularly. You will find out whether you have been a victim of identity theft, have any delinquent credit history, or if you have inaccuracies on your report(s) that need to be corrected. To get your free Equifax and TransUnion credit reports and scores, go to Your reports and scores are updated daily. To get your free Experian credit report and score, go to Like Equifax and TransUnion, Experian updates your report and score everyday.

Here's how you can contact the three nationwide credit bureaus:


P.O. Box 740241

Atlanta, GA 30374-0241



P.O. Box 4500

Allen, TX 75013



P.O. Box 1000

Chester, PA 19016


Here is some additional information about credit reports that you might find helpful:

  • Credit reports contain information about your current debt and bill payment history. They also show where you live and work and whether you've ever filed for bankruptcy. Credit reports help lenders to decide whether or not to give you credit and to determine what interest rate they will charge you.
  • tells us that "70 percent of the credit reports have errors of some kind and 29 percent contained serious errors like false delinquencies and judgements that don't belong to the consumer."
  • The three nationwide credit reporting agencies are Equifax, Experian, and TransUnion.
  • Financial institutions such as credit card companies are not obligated to report your payment details or balances owed to the three nationwide credit bureaus. It is their prerogative. While most creditors report your financial data to all three agencies, some only report it to one or two bureaus, or not all. For example, I had a credit card account with a department store chain which I closed in 2012. Historically, my financial information was only reported to Equifax and TransUnion.
  • If you have delinquent credit history, you will not qualify for the best APRs on any type of debt consolidation loan. In some cases, you might be turned down for a loan altogether.
  • Do not apply for any type of loan until all of the inaccuracies have been removed from your report(s).
  • Never apply for a “bad credit” loan to consolidate your debts because the interest rates can be as high as 30% where permitted by law.
  • If there is inaccurate information on your credit report(s), you can submit an investigation request to a credit bureau via the Internet or by snail mail. Initiating an investigation report online will expedite the process.

There are also specialty credit bureaus that report information such as check writing history, medical payments, employment records, tenant history, car insurance claims, homeowners and rental insurance claims, payday lending, and utility payments. You might not even know that these reports exist until you are turned down for a job, an apartment, a checking account, car insurance, or have to put down a deposit with a utility company before service can be activated. With the possible exception of ChexSystems, a company that gathers and reports information about checking accounts, you can expect to pay a fee for a specialty credit report.

Here is a partial list of specialty credit bureaus by category:

Employment screening:

  • Accurate Background
  • American DataBank
  • EmployeeScreenIQ
  • First Advantage Corporation
  • General Information Services, Inc. (GIS)
  • HireRight
  • Info Cubic
  • IntelliCorp
  • OPENonline
  • SterlingBackcheck
  • Trak 1
  • The Work Number

Tenant screening:

  • Contemporary Information Corp. (CIC)
  • CoreLogic SafeRent
  • Experian RentBureau
  • First Advantage Corporation Resident History Report
  • LeasingDesk (Real Page, Inc.)
  • Screening Reports, Inc.
  • Tenant Data Services
  • TransUnion Rental Screening Solutions

Check and bank screening:

  • Certegy Check Services
  • ChexSystems
  • Early Warning Services
  • TeleCheck Services

Personal property insurance:

  • C.L.U.E. Inc. (Personal Property & Auto Reports)
  • Drivers History
  • Insurance Information Exchange (iiX)
  • Insurance Services Office, Inc. (ISO)


  • MIB, Inc.
  • Milliman IntelliScript

Low-income and subprime:

  • Clarity Services
  • DataX
  • FactorTrust
  • MicroBilt / PRBC

Supplementary reports:

  • CoreLogic Credco
  • Innovis
  • LexisNexis Risk Solutions
  • SageStream


  • National Consumer Telecom & Utilities Exchange


  • The Retail Equation


  • Certegy Gaming Services

Your FICO Score. You should also obtain your FICO credit score at A credit score is a three-digit number used by most financial institutions to determine how likely you are to repay a loan and to make your payments on time. When you apply for a credit card, car loan, or any other type of credit, a lender usually checks your credit score to decide whether or not to extend you credit.

Here is how a FICO credit score is broken down:

  • 35% - Payment history
  • 30% - Amounts owed to creditors
  • 15% - Length of credit history
  • 10% - New credit
  • 10% - Credit mix (credit cards, car loans, lines of credit, etc.)

Most FICO scores range from 300 to 850, and the higher the score, the better:

  • Excellent Credit: 750+
  • Good Credit: 700-749
  • Fair Credit: 650-699
  • Poor Credit: 600-649
  • Bad Credit: below 600

According to NerdWallet, the average FICO score is 695 based on the latest data from April, 2015. About 22% of scores fall below 600, 23.3% are between 600 to 699, and 54.7% are 700 or above.

Here is one way to improve your FICO credit score: Pay all of your bills on time. Payments that are even a few days late can have a negative impact on your credit score.

Based on the key factors that a credit scoring algorithm is looking for, sometimes there is not enough information in a credit report to generate a credit score. According to

  • You have young accounts or not enough of them - If you don't have many accounts, or if the ones you have were all recently opened, you probably haven't built a long enough credit history to be scored.
  • No recent account activity - Even if you're being financially responsible, it's hard for lenders to make a judgment call about your credit riskiness if they can't see how you're using credit.

If you have a low credit score, you will not qualify for the best APRs on any type of debt consolidation loan. In some cases, you could be turned down for a loan altogether. Remember, the higher the number the lower the risk.

Your ChexSystems report. You should also get a free copy of your ChexSystems report. Chex Systems is a consumer credit reporting agency that identifies consumers who have a history of fraudulent behavior with traditional checking accounts. ChexSystems reports include unpaid fees from overdrafts, checks bounced at retailers and other companies, check orders at banks, credit unions, and third-party companies, credit inquiries, and consumer-initiated credit freezes. About 80% of banks and credit unions use ChexSystems reports to assess the potential risks of having an account applicant as a customer.

Courtesy of ChexSystems, here are several components of a consumer disclosure report:

Personal Information: This section displays the names, date of birth, and addresses associated with your ChexSystems consumer file.

Reported Information: Reported Information refers to reports of accounts that have been mishandled, reported for cause, and/or outstanding debts. Reported Information is submitted directly to ChexSystems by members of our service which consists mainly of financial institutions. Our current practice is to retain this information for a period of five years.

Retail Information: Retail Information refers to returned checks written on an account and certain collection accounts. Retailers and other businesses report this information to Certigy Check Services, Inc. ChexSystems receives this information from Certigy Check Services, Inc. and is not involved in the collection of these items.

Just to clarify, reported information such as non-sufficient funds (NSF) activity stays on your ChexSystems report for a period of five years, even if you pay your outstanding balance in full or settle the debt to an agreed-to amount.

To get a free annual Chex Systems report, go to Chex Systems Consumer Assistance.

Get Rid of Unsecured Debt

Once you begin the debt consolidation process, get rid of all forms of unsecured debt including credit cards, payday loans, overdraft protection, lines of credit, and personal loans from banks and credit unions. One of the biggest financial mistakes that you can ever make is to start using credit cards again while paying off a bill consolidation loan.

Consider Secured Debt If You Must

Because most debt consolidation loans are unsecured, the lender can’t lay claim to your home if you are unable to keep up with the payments, though late or missed payments will adversely affect your credit score.

You might not qualify for an unsecured debt consolidation loan because of delinquent credit history. In such a case, you may want to consider consolidating your debt with a secured loan. explains:

There are many options for debt consolidation using secured loans. You can refinance your house, take out a second mortgage, or get a home equity line of credit. You can take out a car loan, using your automobile as collateral. You can also use other assets as security for a loan. A 401K loan uses your retirement fund as collateral. If you have a life insurance policy with cash value, you may be able to obtain a loan against the policy. A variety of financing firms will also loan you money against lawsuit claims, lottery winnings, and annuities.

Often, secured loans carry lower interest rates than unsecured loans so they may save your money on interest payments. Lower interest rates will likely make the monthly payment lower and more affordable. Sometimes, the interest payments are even tax deductible. For example, in many instances interest paid on loans secured by real estate is allowed as a tax deduction.

A single monthly payment with a lower interest rate is likely to ease your financial burden substantially. Also, secured loans are generally easier to obtain because they carry less risk for the lender.

Remember, if a bill consolidation loan is secured and you miss one or more payments, the lender can lay claim to your home or other asset.

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Creditors have better memories than debtors.

— Benjamin Franklin

Face the Alternative: Bankruptcy

One of the primary reasons that people choose debt consolidation is to avoid filing for bankruptcy protection. Bankruptcy is a process where you legally declare yourself unable to pay your outstanding debts. You must meet with a judge in order to establish a payment schedule or to have most or all of your debts discharged. The two types of personal bankruptcy are Chapter 7 and Chapter 13.

Here are six reasons why the consequences of bankruptcy can be overwhelming:

  • Bankruptcy stays on your credit report for 10 years and can make it difficult to get credit, buy a home, get life insurance, or even get a job.
  • Unlike debt consolidation, bankruptcy is a public record.
  • Bankruptcy doesn't come cheap. Kathleen Michon tells us that "attorney fees for a Chapter 7 bankruptcy range from $500 to $3,500 depending on the complexity of the case. Larger firms with more advertising and overhead costs may charge more than a solo practitioner. Michon adds that Chapter 13 fees "are different for each judicial district. However, they are typically between $2,500 and $6,000 depending on whether you are an employee or have your own business."
  • Bankruptcy cannot eliminate alimony or child support obligations, criminal fines, and your most recent back taxes. Except in very limited circumstances, it cannot wipe out student loans.
  • Bankruptcy will make it nearly impossible for you to get a mortgage.
  • There are emotional and social stigmas to filing for bankruptcy. David Haynes observes that “the stigma does not affect your finances in any way. It purely relates to how people view you. So, if you are a person that is very concerned with what people think of you, the social stigma may matter greatly.”

Understand Debt Consolidation Fees

Here are five types of debt consolidation fees:

  • Annual fees - You will probably have an annual fee if you get a home equity loan, a home equity line of credit, or a credit card balance transfer. Annual fees are usually around $50.
  • Balance transfer fees - If you do a credit card balance transfer, you will have to pay a fee of 3% to 5% of your total card balance. For example, if your balance is $20,000, you can expect to pay a fee of $600 to $1,000.
  • Early cancellation fees apply to home equity lines of credit. Generally, the fee is about 1% of the total loan amount.
  • Late fees - tells us that "while normal credit card late fees run between $15 and $35, a late payment during a balance transfer introductory period can cost you hundreds of dollars. That’s because, according to the terms of most balance transfer offers, you start with a low (or even zero percent) interest rate for a limited period of time – but that disappears if you make even one late payment."
  • Origination or closing fees apply to new home equity loans or unsecured debt consolidation loans. Origination fees generally range from 1% to 5% of the total loan amount.

The Difference Between Debt Consolidation and Debt Settlement

Debt consolidation should not be confused with debt settlement, another form of debt reduction.Debt settlement--also known as debt arbitration, debt negotiation, and credit settlement--is a debt relief approach where negotiators communicate with creditors on your behalf to settle your debts to reduced and agreed-to amounts. Only unsecured debt—credit cards, medical bills, and personal loans—can be negotiated. You cannot settle mortgages, rent, utility bills, cell phone and cable charges, insurance premiums, car and student loans, alimony, child support, taxes, or criminal fines.

Once you enroll in a debt settlement program, your negotiation team opens a trust account for you. You must deposit up to 50% of your unsecured debt into the account over a period of 24-60 months. This money is used to settle your debts with creditors. Because the average debt settlement firm is for-profit, you must also pay the company a 15-25% service charge. This fee is based on the original amount of your unsecured debt or the amount negotiated, depending on the debt settlement company.

Most debt settlement companies use a third-party escrow service to "warehouse" the money that they will later use to fund the settlements they negotiate for you. The most popular escrow company is Global Client Solutions which is located in Tulsa, OK. Sending money to your trust account is generally done through ACH on the same day each month. If your checking account is with a bank where you also have a past-due loan or credit card balance, I suggest that you use a different bank for your debt settlement program. Why? A bank could seize all or part of the money that is in your account as part of their “lawful collection activities.”

Author’s note: Recently, the Consumer Finance Protection Bureau (CFPB) took action against Global Client Solutions for processing illegal debt-settlement fees. The payment processor had to pay over $6 million in relief to consumers as well as a $1 million civil penalty. According to the CFPB:

The CFPB alleges that Global Client Solutions and its two principals, Robert Merrick and Michael Hendrix, violated the Telemarketing Sales Rule by making it possible for debt-settlement companies to charge consumers illegal upfront fees. The rule prohibits debt-settlement companies from charging consumers advance fees before settling any of their debts. The rule protects consumers from the risk of spending money on services that may not materialize and may ultimately leave them even worse off.

According to the CFPB’s complaint, since October 2010, Global Client Solutions processed tens of millions of dollars in illegal advance fees from tens of thousands of consumers. Global Client Solutions processed these unlawful fees on behalf of hundreds of debt relief companies across the country.

Here are three things that a debt settlement company must tell you before you join their program:

1. You must be given an "upfront estimate" in writing of all costs associated with settling your debts to reduced and agreed-to amounts.

2. You must be given an "estimated timeframe" to reduce your debt.

3. You must be told that debt settlement adversely affects your credit score.

Here are some examples of what a debt settlement company cannot tell you:

“We can eliminate 50–70% of your debt.”

"We can settle your debt to pennies on the dollar."

"We can cut your debt in half."

"Debt settlement will not affect your credit score."

“Calls and letters from creditors will stop once you enroll in a debt settlement program.”

“Debt settlement does not affect your taxable income.”

“Once you join a debt settlement program, you will no longer have to communicate with your creditors.”

How much is a typical debt settlement offer today?

Despite repeated warnings from the Federal Trade Commission (FTC), a few debt settlement companies still claim that they can reduce your debt to “pennies on the dollar.” If you define “pennies on the dollar” as ten cents or less, this just does not happen today. Be careful of taking something that you read or hear too literally. While one national bank may have settled for 40% off in 2010, they might only be settling for 25% or 30% off today. Michael Bovee affirms:

It is far better to look for current information regarding your creditors and collectors. It is also best not to read too much into anonymous postings from yesteryear when it comes to negotiating settlements that impact you today.

To clarify:

1. If a bank settles for 25% off, you still owe them 75% of your outstanding balance.

2. If a bank settles for 30% off, you still owe them 70% of your outstanding balance.

3. If a bank settles for 40% off, you still owe them 60% of your outstanding balance.

4. If a bank settles for 50% off, you still owe them 50% of your outstanding balance. In today’s economy, it is rare for a creditor or collector to make a settlement offer above 50%.

5. If a bank settles for 70% off, you still owe them 30% of your outstanding balance. As I stated above, settlements like this do not happen very often today.

Here are six disadvantages of debt settlement:

  • Debt negotiation adversely affects your credit score.
  • During the debt settlement process, calls and letters from creditors might continue. Enrolling in a program does not automatically stop "lawful collection activities."
  • Participation in a debt negotiation program cannot stop creditors from suing you for any unpaid balances.
  • Hiring a debt settlement company that is not of your geographical area could have serious financial consequences. Here is an example: A woman from New Jersey hired a California-based debt settlement service that outsourced all legal matters to a law firm in Florida. (Yes, you read that right!) When she was sued by a creditor for an unpaid balance, the law firm did not personally represent her in court. All correspondence was handled either by email or on the phone. The woman subsequently lost the case and was handed a judgment for over $10,000.

  • You might suffer tax consequences. For example, if you owe $25,000 and settle for $15,000, the $10,000 difference is considered taxable income. The creditor must send you a 1099-MISC reporting a "discharge of indebtedness income.”
  • Despite repeated warnings from the Federal Trade Commission (FTC), some debt settlement companies still claim that they can reduce your debt to “pennies on the dollar.” If you define “pennies on the dollar” as ten cents or less, this just does not happen today. Be careful of taking something that you read or hear too literally. While one national bank may have settled for 40% off in 2010, they might only be settling for 25% or 30% off today.

Understand How Consolidation Could Affect Your Credit

Bill consolidation could hurt your credit score over the short term. For example, applying for a debt consolidation loan from a bank or credit union requires a “hard credit check,” which might affect your score a small amount. Although you might see a temporary dip, this is safer than the risk of charging more on your credit cards and getting deeper in debt.

You must also be aware of how a debt consolidation loan might affect your “credit utilization ratio.” According to

Credit utilization refers to the percent of your available credit that you’re currently using. For example, if the credit limit on all your credit cards combined is $30,000 and you have $15,000 in credit card debt then your credit utilization is at 50%. But if you get a debt consolidation loan and close all your credit card accounts, your total debt will still be $15,000 but your credit utilization will now be 100%, which may hurt your credit score.

Be Sure You Can Make The Monthly Payment

Before you enroll in a program, review your budget carefully and make sure that you can afford the monthly payments. Don’t be surprised if you have to eliminate certain nonessential expenses. Remember, your financial well-being is more important than trying to impress Mr. and Mrs. Jones with an $89 wine chiller.

By the way, nearly 70 percent of people who enroll in a debt consolidation program drop out because they cannot afford to make the monthly payments or because they have started to use credit cards again.

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Interest on debts grows without rain.

— Yiddish Proverb

If you decide to consolidate your debts without borrowing more money through an arrangement with a non-profit or for-profit consolidator, consider the tips below.

What Can a Consolidator Charge You?

According to the Federal Trade Commission (FTC), a debt consolidation company cannot charge upfront fees before offering you a service. Lori Swanson of the Minnesota Attorney General’s Office confirms:

Federal rules ban debt assistance companies nationwide from collecting up-front fees before they deliver a service. Before a debt assistance company can collect a fee, it must have resolved at least one of the consumer’s debts, have a written contract with the consumer, and the consumer must already have made at least one payment to the creditor. Non-profit agencies and some attorneys, such as those that meet face-to-face with their clients, may not be covered by the rule, so make sure that you closely read any written contract before you agree to purchase services from a given debt assistance company. Under the new rules, debt assistance companies must also tell the truth about how long their program will take to resolve a consumer’s debts, how much it will cost, and that failing to pay your creditors may damage your credit rating and lead to legal action against you.

Contrary to popular opinion, a non-profit debt consolidator charges nominal fees for their services.

But if a debt consolidation company is for-profit, you can expect to pay a service charge of about 3% to 10% of your debt's face value.

For example, if the original amount owed to creditors is $25,000 and you are charged a 7% fee spread out over 36 months, you will pay $48.61 each month to the consolidator in addition to your principle and interest. Summarizing:

$25,000 – Total amount of your original debt

$1,750 – 7% of $25,000

$48.61 - $1,750 divided by 36 months

Do not pay a company a monthly service charge that exceeds $50.

Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.

— Ogden Nash

Ask Questions About Your Debt Consolidation Company or Agency

Find out how long the agency has been in business and how much consumer debt the firm manages each year.

Some debt consolidation companies give you little information on their websites or landing pages about the services they provide. They are primarily interested in having you sign up for a “free debt relief consultation” so that they can pressure you into joining their program. Frequently, these companies use a “cookie-cutter approach” to consolidating debt instead of devising a plan that meets your specific financial needs. Instead of employing certified debt counselors, they often hire commission-based sales personnel who know little or nothing about debt reduction.

An agency should offer budget and credit education. tells us that:

Reputable organizations are willing to help you manage your finances through counseling and education. Ask if the agency offers workshops or educational materials. Are they available for free? Are they accessible online or can the materials be mailed to you? If the agency insists that a debt management plan is the only option for clients, look elsewhere. Creating and maintaining a budget should be a primary tool of the agency.

You should be assigned to an experienced financial counselor to ensure that your debt consolidation program flows smoothly from start to finish. Find out how much a prospective counselor knows about the debt consolidation industry. Don’t be afraid to ask questions like these:

  • What is the difference between debt consolidation and debt settlement?
  • Is bill consolidation a public record like bankruptcy?
  • Name at least three types of debt consolidation loans.
  • Can I consolidate utility bills, cellphone charges, a car loan, medical bills, alimony and child support payments, or back taxes that I owe to the IRS?
  • Explain how a credit card balance transfer works.
  • Can a debt consolidation company represent me in court if I am sued by a creditor?
  • Can I continue to use credit cards while I am paying off a bill consolidation loan?
  • Where can I get a free credit report and free credit score?
  • How can I improve my FICO score?
  • I heard that a bill consolidator is allowed to charge upfront fees before offering a service. Is this true? (Author's note: This is a trick question that is intended to separate the amateurs from the pros.)
  • What are the different types of bill consolidation fees?
  • I bounced a check several years ago with a utility company. Is there any record of this other than with my bank and the utility provider?
  • Will debt consolidation affect my credit score like debt settlement?

Find out if Is the counselor certified by the by the National Foundation for Credit Counseling (NFCC) and/or the International Association of Professional Debt Arbitrators (IAPDA)? The NFCC’s mission is “to deliver the highest-quality financial education and counseling services.” The IAPDA is North America’s “leading debt negotiation and credit counseling training and certification program.”

Check to see if the firm is accredited by the American Fair Credit Council (AFCC) and is also a member of both the National Foundation for Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

What about privacy and security? advises:

What assurances do you have that the agency will keep information about you confidential? Does the agency have a privacy policy and are you comfortable with its terms? If not, select another agency. Security practices are also of importance. How does the credit counselor protect the security of client information?

Make sure that the company is licensed to do business in your state. For example, Florida and Maryland do not require licensing of debt consolidation agencies.

Before you sign a contract with a business, be sure to read all of the fine print. For example, find out if there are any fees for a late or missed payment.

Before you join a program, type in the company’s name followed by the word “complaints” into a search engine. Learn what others have said about the company and whether the firm has ever engaged in any unfair business practices.

Find out if the company is a member of the Online Business Bureau as well as their local BBB. Check their ratings with both bureaus and whether any complaints have ever been made about their services.

Before making a final decision, contact all of your creditors first and find out if they are willing to work with a particular company. Never pay a consolidator until all of your creditors have approved your modified payment plan.

After You Start Payments

Once you begin to pay the consolidator, contact all of your creditors and find out if they are receiving the monthly payments.

No matter what—make your payments on time to the consolidator.

Remember that a debt consolidation company cannot represent you in court unless it is also a law firm. In addition, it cannot prevent the foreclosure of your home or the repossession of your car.

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This would be a much better world if more married couples were as deeply in love as they are in debt.

— Earl Wilson

How You Can Save Money Through Debt Consolidation

Let's apply interest-rate arbitration to a typical financial situation:

Suppose you have $20,000 of credit card debt with an average APR of 23%. Assuming that you make no additional purchases or cash advances, it will take you 145 months to get out of debt if you only make the minimum monthly payments. You will pay $38,085 in interest and a grand total of $58,085 (principal + interest).

If you take out a debt consolidation loan at a more reasonable 15% APR and make a fixed monthly payment of $400, it will take you 79 months to become debt free. You will pay $11,605.88 in interest and a grand total $31,605.88 (principal + interest).

Let's compare your total payments by taking out a debt consolidation loan and by only paying the minimum amount due each month.

Here are your total payments by using debt consolidation:

$20,000 - Original amount owed to creditors

$11,605.88 - Interest paid

$31,605.88 - Total payments

Here are your total payments by only paying the minimum amount due each month:

$20,000 - Original amount owed to creditors

$38,085 - Interest paid

$58,085 - Total payments

By using debt consolidation, your net savings is $26,479.12 and you become debt free 66 months sooner than by making the minimum monthly payments.

Here is another example of how interest-rate arbitration works:

Let’s say that you have $30,000 of credit card debt with an average APR of 21.5%. Assuming that you make no additional purchases or cash advances, it will take you to 128 months to become debt free if you make a fixed monthly payment of $600. You will pay $46,629.20 in interest and a grand total of $76,629.20 (principal + interest).

If you take out a debt consolidation loan at a more reasonable 12% APR and continue to make a fixed monthly payment of $600, it will take you 70 months to get out of debt. You will pay $11,817.33 in interest and a grand total $41,817.33 (principal + interest).

Let's compare your total payments by taking out a debt consolidation loan and by using your old plan:

Here are your total payments by using interest-rate arbitration:

$30,000 - Original amount owed to creditors

$11,817.33 - Interest paid

$41,817.33 - Total payments

Here are your total payments by using your old plan:

$30,000 - Original amount owed to creditors

$46,629.20 - Interest paid

$76,629.20 - Total payments

By using debt consolidation, your net savings is $34,811.87 and you get out of debt 58 months sooner than by using your old plan.

Where you can find a reputable debt counseling company

You can connect with an NFCC (National Foundation for Credit Counseling) consumer credit counselor in your area by going to or by calling 1-800-388-2227.

What are the best debt consolidation companies for 2017?

If you believe that debt consolidation is right for you, here are TheSimpleDollar's best consolidation companies for 2017.

The only man who sticks closer to you in adversity than a friend is a creditor.

— Unknown


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