‘Caveat emptor’ or ‘let the borrower beware’ probably holds true of any industry, but especially so in the financial services sector. While there are no hard facts to support this, my sense is that for every legitimate debt counseling service that arrives on the scene, three fly-by-night debt counseling services are also spawned.

According to a post on MSN Money titled The consumer’s guide to credit counseling, poster Liz Pulliam Weston offers the following red flags to be on the lookout out for

• Big upfront fees. Consumer Credit Counseling Services typically charge a $10 set-up fee. If you’re paying a lot more, you may be the one who’s getting set up, unless you’re getting extensive and personal money coaching that could justify the fee.
• No accreditation. Legitimate credit counseling firms are affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.
• Delayed or missing payments. Some companies pocket your first months’ payments as a fee, rather than passing the money on to your creditors. Missing payments can hurt your credit rating. Find out how much of each monthly payment is going to your creditors, and when it will be sent to them.
  
• Unrealistic promises. Some companies falsely promise that you can settle your debts for little or no money, without hurting your credit rating. Legitimate credit counseling services help you pay back what you owe, albeit at lower interest rates, and acknowledge there may be some affect on your credit rating and ability to obtain new credit.

Above all, let common sense be your guide. I have said it here a hundred times before and I will shamelessly continue to say it: If it sounds too good to be true, it is.

Read the entire post at MSN Money.

Now of course, if your finances are such that you are about to lose everything for being charged up and mortgaged up to your eyeballs, then debt consolidation is a wise choice. A good DMP can give you the time and space you need to get a handle on your financial situation and avoid disasters like closed accounts, foreclosure, and having your credit score tank. The flip side, however, is that you lose your ability to charge new purchases and establish new lines of credit. Furthermore, your credit scores do go down for a period until a consistent repayment pattern has been established.

With that said, the most prudent approach to consolidating your debt is to make a plan. This concept was outlined well in a post on Prosper.com titled Prosper Debt Consolidation Lo - Tips for Potential Borrowers that organizes the whole ‘planning process’ and helps prospective borrowers determine a) if they need to take out a debt consolidation loan in the first place and b) if they do, which debts should they have included as part of the plan. Many people erroneously believe that since they are consolidating anyway; why not include all of your debts? According to the article, that could be a bad idea for the following reasons

1. Lower amounts fund quickly. You are more likely to get funded if you request a small amount. It will take fewer lenders to fully fund a small loan. Also, its going to seem less risky for them. They want to see a monthly payment that you can definitely handle. Plus you’ll have a lower DTI, that helps too.
2. More likely to get funded at a higher rate. If you’re credit is less than perfect, you can not expect a low rate. By selecting only your highest interest debts for this loan, you can reasonably ask for a rate that will save you money.
3. Gain leverage with the credit card companies. As soon as my balances were paid in full, Chase and Discover began to see the light. Credit limit increases and great balance transfer deals started flying my way in no time. APRs were dropping like flies. For example, Chase offered me a fixed 5.99% balance transfer with no fee. That is a great deal. I was able to use that on my next highest interest credit card account for additional savings. I would have lost the opportunity to take advantage of that if I had consolidated all of my debts at once. You might also want to stay on the lookout for 0% transfers for some of your remaining balances. No loan on Prosper will ever beat that deal!

This is an example of the great information that the article outlines in the following steps

1. Examine Your Budget
2. List Debt Obligations with Interest Rates
3. Determine a Cut-Off Line
4. Determine a Good Rate

So, if you are in the process of designing your debt consolidation loan strategy, follow the steps this article prescribes and make your decision to consolidate your debt a smart one.

Read the full post on Prosper.com.