How To Spot Debt Consolidation Scams

If you’re struggling to pay off credit card debt, you’re not alone. According to a survey by New York Life, Gen Xers have the most credit card debt of any generation: more than $9,200 on average per person.

With many credit cards charging interest rates of 20% or higher, that figure is not surprising. If you’re unable to pay off your balance each month, interest rates that high increase the amount you owe and cause you to reach your spending limit — fast.

If this sounds familiar, a consolidation loan can be a good idea.

What’s a consolidation loan

A consolidation loan is a personal loan from a bank or credit union that allows you to pay off your high-interest credit cards and combine your debts into one fixed monthly payment. Often, you can get a lower interest rate than what you’re currently paying, which helps you reduce your total debt and reorganize it so you can pay it off more quickly.

If you decide to take out this kind of lower-interest loan to pay off your high-interest credit cards, keep in mind that you’re most likely feeling overwhelmed and that makes you vulnerable to scammers who prey on people considering debt consolidation.

How to tell if it’s a scam

AARP Foundation has rounded up eight red flags to help you spot a scam before it’s too late.

1. They ask for an upfront payment
   While there are reputable companies that offer debt consolidation services and financial counseling, they will never ask you for an upfront fee before receiving assistance.
2. They pressure you to act fast
   This is the hallmark of debt consolidation scams, as well as most other financial scams. The scammers are savvy and know how to make you feel flustered enough to give them money without thinking it through.
3. The company contacts you first with an unsolicited offer
   Scammers may reach out in many ways like text, email, or phone. Be wary if you didn’t contact them first. Always research the companies you do business with.
4. They tell you to “cease contact” with your creditors
   Your financial situation could go from bad to worse if you ignore your creditors completely.
5. They tell you to stop paying your bills.
   Instead, scammers will ask you to send the payment to them instead of your creditor. In the meantime, your debt will be handed over to collections, which may lower your credit score.
6. They refuse to disclose the terms
   If they won’t tell you how much you’ll owe, what the interest rate will be, or explain exactly what you’re getting yourself into, this is not a reputable company.
7. They guarantee debt forgiveness or reduction
   Pay close attention to guarantees, especially dramatic claims. While a company can work with your creditors on your behalf to negotiate a favorable loan, if it sounds too good to be true, it usually is.
8. They claim to have access to a “special government program”
   Watch out for companies that say they know about “secret” programs or “special” loopholes. It’s just another sales tactic designed to get you to act before you have time to think.

What else to keep in mind

The more you know about a company, the less likely you’ll be scammed. Doing your own research, like looking up a company’s standing with the Better Business Bureau can give you peace of mind.

Your bank or credit union may give you a favorable rate just for being their customer. Call or stop by to make an appointment to go through your options. Additionally, debt.org can point you to reputable debt relief companies.

Finally, experts recommend you compare multiple offers before you sign up for a loan. Remember to read the fine print, ask about any fees, and get everything in writing.

How to begin paying off debt

If you’re reading this article, it’s likely time for action. Now that you understand how to avoid scams, there are two debt payment methods you should explore: Avalanche and Snowball. AARP Foundation breaks down the pros and cons of each — and how to get started — here.