Should You Lump Credit Card Debt Together?

Many companies providing consolidation loans offer only short-term low interest rates. In other words, if you do not pay off the debt in full by a certain date, they raise the interest rate back up to the average rate of 18 to 20 percent. Finance companies that deal primarily in debt consolidation loans are among the worst options for consumers in need of a loan as the fees are often enormously high, Hobson said.

Before seeking a debt consolidator, contact your creditors to negotiate a management plan and a lower interest rate. Remember, you lose the ability to negotiate with your creditors once they turn your debt over to a collection agency. More importantly, commit to changing your buying and borrowing habits before taking on any additional loans.

Roll Loans Onto Credit Cards?

Michael LaPorte, a 33-year-old attorney, tried to reduce his debt by transferring half of his student loan debt from his loan creditor to credit cards. Now, he owes $30,000 in credit card debt, and pays two to three times the minimum payment each month.

La Porte should not have put his loan on the credit card, Hobson said.

"Student loans usually have anywhere from a 6 to 8 percent interest rate, and you have a lot more flexibility in negotiating with student loan companies than credit card companies," Hobson said. "Once you put the loans on your regular credit cards, you've jumped back up to interest rates around 18 percent. So again, unless you know you can pay them off very quickly, don't do it."

LaPorte pointed out that many debt consolidation companies claim to be "non-profit," but Hobson says that term can be deceiving.

"Non-profit doesn't mean no-profit," Hobson said.

Sometime debt consolidation companies will take one month of payments as a service fee, set-up fee or processing fee. Money that you think is going to your credit card company is going to the credit counseling company, Hobson said.

In other instances, the debt consolidation agencies refer consumers to another company for a loan, since they do not offer loans themselves. They sometimes are associated with for-profit lenders, essentially passing on your business to their friends.

"Bottom line — this is a business to make money," Hobson said. "Ask yourself what are they doing for you that you couldn't do yourself with just a few phone calls."

Which Companies Are Legitimate?

Carlas Gilbert, 35, of Chicago, owes about $10,000 in credit card debt over five cards. She pays about $600 a month to try to whittle it down. She wanted to know how to know which debt consolidation companies are legitimate.

"You see all these ads for companies, so how do you know which ones are legitimate, and which aren't?" Gilbert asked. "How do you know the difference?"

Hobson says to be wary of companies that offer "simple solutions," and look out for danger signs, words like "easy," "painless," and "cannot be turned down."

Generally, the "good guys" belong to the National Foundation for Credit Counseling, which has more than 1,300 offices nationwide, Hobson said.

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