Debt Consolidation: What's the Deal?

It has a great "Whoosh! Soon-it'll-all-be-gone" sound. To say nothing of an "I'm taking charge!" sound. These days we get bombarded with ads from companies saying that for no fee they'll consolidate all our debt. What, actually, does that mean?

Here's how, under ideal conditions, it works. (More about the less-than-ideal conditions later.) A company -- which usually offers both "credit counseling" and "debt consolidation" services -- goes over all your expenses with you and decides what you can afford to pay, TOTAL, per month toward your debts. Then they negotiate with all your creditors (this only works for UNSECURED debt, not car loans and mortgages), getting down your "minimum" payments and even lowering your interest rates. One company online claims it can "achieve" the following rates "instead of the usual 18 percent to 20 percent: Chase Manhattan 9 percent, Citibank 8 percent, Bank of New York 6 percent, Bank of America 0 percent (that's right, zero percent interest!)."

Thus they can claim they're saving you money, since the overall amount you'll have to pay to get rid of that $4,500 Visa debt is less, if you're paying a lower interest rate and putting more per month toward the principal. And indeed they are, although you might be able to get the same deals yourself if you're a smart wheeler-dealer. But let's say you have them do it for you. They will also make the payments to your various creditors each month, while you only have to bother yourself with writing out one check: to them.