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You Asked, We Answered: The Truth About Debt Consolidation Companies

Update: Many debt consolidation companies advertise themselves as nonprofit or faith-based organizations. While there are many legitimate and well-meaning nonprofit and faith-based organizations, you should always check their credentials and, most importantly, their effectiveness. You shouldn’t judge a book by its cover and just because a debt consolidation company advertises itself as a non-profit or faith based debt consolidation company doesn’t mean that they will get you out of debt faster than a for profit company. Regardless of whether you binge on shopping or simply use credit cards to make ends meet, there may come a time when you need a financial intervention to help organize your bills, repay your debt, and improve your finances. For some, debt consolidation is the answer. But before you jump in head first, it's time for a course in Debt Consolidation 101.

1: When Should You Use a Debt Consolidation Company?

Debt consolidation combines multiple debts into one, single payment, with the purpose of simplifying your repayment schedule and lowering your overall monthly payment amount. A debt consolidation company may be able to help you pay off your debt more quickly and alleviate some of the stress associated with paying bills. So if you have mounting unsecured debt (e.g., credit card bills, store cards, medical bills, student or personal loans, accounts in collection, etc.), working with a trusted debt consolidation company is something to consider.

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For these plans to work, you should have some form of income. A debt consolidation company will then work with you to craft a repayment plan based on a realistic monthly payment amount you can afford, as well as advocate on your behalf to your creditors and make your debt more manageable.

2: What Types of Plans are Available?

There are two methods of debt consolidation. Both methods achieve the same result but differ in their approaches. Your success hinges upon your ability to understand these differences and pick the right plan for your needs:

  • Debt Management - This strategy consolidates unsecured debt into a single monthly payment that you send to a debt consolidation company. That company then distributes the designated funds to your creditors. The debt consolidation company works directly with your creditors to secure benefits that help you fulfill your obligations over time. Such benefits may include interest rate reductions, late and over-the-limit fee waivers, and reduced monthly payments.
  • Debt Settlement - This plan helps people who can't repay their debt in full and facing bankruptcy. Under this arrangement, your debt consolidation company will approach your creditors with an offer to settle your accounts for a portion of the amount owed.

A good debt consolidation company can help you choose the best plan for your financial situation based on your income level, type of debt, and ability to make consistent payments.

3: Do All Providers Offer the Same Service?

No! Just as each person's financial situation is unique, so too are debt consolidation companies. Locate a partner that offers various plans and expertly guides you to the right solution based on your needs, not their balance sheet.

Call each company you're considering and ask directed questions about their service offerings. Then, compare the fee structure and services of multiple providers so you can assess each company's reputation and accreditations. Identify the pros and cons about both debt management and debt settlement plans so you can determine which service will best help you succeed.

Additionally, many debt consolidation companies offer more than just service plans, so look for a full-service partner that will not only help get you out of debt, but will also teach you how to remain out of debt in the future. Tools to look for include:

  • Free educational resources
  • Monthly newsletters packed with legislative or regulatory updates and how they may impact your credit standing, expert advice, timely articles about budgeting and other relevant topics, etc.
  • 24-hour account access online or by phone
  • Money management tools ranging from loan calculators to budgeting worksheets and more
  • An online community filled with real advice where you can connect with like-minded people facing similar challenges

4: Are There Bad Debt Consolidation Companies?

Yes! Fail to choose the right company and you could end up in a worse situation than when you started. When you begin your research, try a simple online search to help determine which debt consolidation company is the best. You may even enter the search term "good debt consolidation company." Just be careful; the results may not be pleasant if you get mixed up with an unethical provider. To prevent this disaster, follow these tips:

  • Don't accept a plan from a company that hasn't reviewed your financial situation.
  • Don't be lured by companies promising government money to erase your debt. There are no government programs that do this.
  • Read proposed fee schedules carefully. New laws prohibit for-profit companies from charging upfront fees. So if this type of provider wants to charge you fees before they have negotiated an agreement with one of your creditors, they're not legitimate. Non-profit companies have been urged to follow this regulation, but aren't forced to, so the bottom line is to be cautious and careful. Read everything and only agree to what seems reasonable.

5: Is it Important to Work with a Best-Rated Debt Consolidation Company?

Yes! Accredited debt consolidation companies are a worthy choice. Narrow down your search by identifying trusted debt consolidation companies whose solid reputations will provide creditors with an added sense of security, which will translate into better benefits for you. For example, look for debt consolidation companies that are accredited Better Business Bureau businesses, ask friends, family members and co-workers for recommendations.

Debt consolidation plans work most effectively when you choose a reputable and accredited company, stick to the plan and, ultimately, address how you got yourself into debt in the first place. After all, you need to retrain your spending habits, better budget each dollar you earn, live within your means, and possibly remove all credit cards from your wallet, so you're not tempted to use them. With the right plan and right debt consolidation company, you CAN survive your debt.

If you liked this you may also like:

  • Understanding Your Debt-To-Income Ratio

    Your Debt-to-Income Ratio is a crucial personal financial health indicator. Find out how to calculate it and what it means to you.

  • Debt Relief: Myth & Reality

    Debt relief comes in many forms- credit counseling, debt consolidation loans, settlement and even bankruptcy. Each solution will help you get out of debt, but the long term impacts and fees can vary greatly. Understand the myth and reality behind your debt relief options.

  • Is Debt Consolidation A Good Idea?

    If you have lots of debt, consolidation may save you time and money. Depending on your financial situation, there may be a solution that's right for you.

  • Do You Need Debt Relief?

    Feeling overwhelmed by your debts? Having trouble making ends meet? Unable to get ahead of your credit card debts? A Debt Relief plan may be your solution to getting control of your finances.

  • Debt Consolidation Loans: What to Consider When Weighing Your Options

    When faced with mounting bills, many consumers explore debt consolidation loans as a way to get their finances back on track as quickly as possible. And while a debt consolidation loan may be a great solution for you, it's important to weigh your options to determine the best plan for you and your specific financial situation.

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