Their ads are enticing. Credit card debt consolidators, that is. They make grandiose promises. Some promises include cutting your debt by up to 60 per cent and making you debt-free today. Are they for real? Indeed, is it smart to consolidate your debt? The answers may surprise you.

The term “credit counseling” is often misused. How?

You see, that term (credit counseling) gets mixed up with debt settlement, debt consolidation, debt management, debt clinics and more, and gets “lost in translation” so to say. What’s worse, some of the so-called credit counseling agencies, including a few “nonprofit” are nothing but scam operations.

But first to answer the question: is it smart to consolidate your debt? Yes and no. What do I mean?

Creditors are often more than happy to work with reputable organizations that specialize in helping debtors who are serious to repay their debts. These include credit counseling and debt consolidation agencies.

A good credit counseling agency can among other things help you in, 1) negotiating for a lower interest rate on your behalf, 2) assisting you make a realistic budget that you are likely to stick with 3) finding leaking points in your finances, and 4) coming up with a workable repayment plan. These are all good things.

Depending on your particular situation, a credit counselor might also recommend or offer you the option to consolidate your debts. This means that you’ll be making one monthly payment, often at a lower interest rate.

The objective of consolidating debt is to pay off all your debt in terms acceptable to your creditors but that also leave with some money for your living expenses. After agreeing to a certain monthly figure, you are required to remit the funds to the consolidator, who then distributes it to the various creditors.

A debt consolidation company often can also negotiate waiver of late and over-limit fees, therefore reducing the debt burden.

And, once you have been set up with a debt management plan (another term for debt consolidation), creditors and debt collectors should stop calling you and instead call the agency. You can now breathe easier, with all those collectors off your back.

But there are also downsides and even dark sides of debt consolidation. For one, debt consolidators do charge a fee, often exorbitant if you come across the wrong type.

Secondly, cases exist where a debtor paid a consolidation company, but the company never disbursed the money, using it for their own purposes. The hapless consumer realized, often too late, that her/his bad situation that was supposed to be getting better only got worse. And she/he now had an even bigger dent in her/his credit rating.

Some debt consolidators charge hefty fees upfront. Some of them will require an amount equal to your first payment in order to set you up, asking you to negotiate for a repayment delay with your creditors. If you come across this type, run!

While on a debt management program, you will be required to close all your credit card accounts, which will hurt your credit score. Also, you will not be allowed to open new credit accounts, therefore you won’t start rebuilding your credit history. Credit experts recommend that you start rebuilding a good credit history right away.

Debt consolidation is a double-edged sword. Use it if you must, especially if it’s the only way to avoid bankruptcy (which can be devastating to your credit for 7 to 10 years). But first do explore other options.

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