Hoping to ditch your debt?

Deseret News (Salt Lake City), Jan 25, 2004 by Greg Kratz Deseret Morning News

Nobody likes being in debt.

There's nothing fun about sending a check to the credit-card company every month, only to see your balance shrink little, if at all, thanks to finance charges and new "emergencies" that you have to take care of with plastic.

As most of us have discovered, getting into debt is much easier than getting out of it.

That's the problem facing Ted and Kristin, who sent me an e-mail asking about debt consolidation.

"We have had some poor financial times recently and have incurred some relatively high credit-card debt, which has ultimately hurt our credit," they wrote. "We are wondering if debt consolidation is something worth trying, and if so, what are the reputable companies to use, because there are so many."

Ted and Kristin's situation is, unfortunately, fairly common. I asked Paul Richard, executive director of the nonprofit Institute of Consumer Financial Education in San Diego, what he thought of debt consolidation.

Paul says debt consolidation can work for some people, but they must understand one key concept from the start.

"What happens with most people when they do consolidation loans is they pay off old debts, but they fail to close the accounts," he says. "If you're going to go that route, make sure you . . . close out all those accounts. That's one way to raise your credit score, is to have fewer accounts available."

Paul also says that, if you are not a homeowner, consolidation probably is not for you. Most lenders will help people who have home equity, he said. If you don't have that collateral, you will pay much higher interest rates on a consolidation loan.

If you are not a homeowner, he says, "change your spending techniques and put all of the extra cash you can into paying off bills and closing down accounts, starting with the most expensive ones first."

Paul says that, if you are a homeowner and want to consolidate debt, you should check first with your mortgage company. If you haven't done it already, you might be able to refinance your home loan, get some extra cash to pay off your charge accounts and still make a smaller monthly mortgage payment than you have now.

If you don't want to try debt consolidation through your mortgage company, other options are available. In fact, your e-mail inbox is probably filled with offers from companies promising to help you crawl out from under your pile of debt.

But before you sign up for their services, make sure they are legitimate.

"Most reputable people don't advertise by spam, number one," Paul says. "A lot of these people that claim they're debt consolidators are fronts for attorneys that sell them on bankruptcy. They need to watch out for that."

Paul also says negotiating a smaller pay-off amount for your debts usually is not a viable option. If you do use negotiation, it will show up on your credit file as a charge-off, and that will be a red flag to future lenders.

Having debt excused also could catch the attention of the Internal Revenue Service.

"If you're going to get a lot of debt forgiven through these people, you will have the IRS looking at you," Paul says.

The bottom line is "buyer beware." Before you sign up with a debt consolidation company, check it out with the Better Business Bureau. The Web site for the local BBB is www.utah.bbb.org/, and you can contact them by telephone at 892-6009.

I hope this helps, Ted and Kristin, and good luck in ditching your debt. Let me know how everything turns out!

If you have a personal finance question, e-mail me at gkratz@desnews.com or send it to the Deseret Morning News, P.O. Box 1257, Salt Lake City, UT 84110.

E-mail: gkratz@desnews.com