Mellody's Mail: Consolidating Debt

Q U E S T I O N: My husband was laid off November 2003, went on disability and now he's looking for a job. We are at the point of not being able to pay our bills. Do you know of a trustworthy credit counseling company or a debt consolidation company -- someone that can reduce the interest rates, etc.? I need a company I can trust. Thank you for your time.

A N S W E R: As the New Year gets under way, many consumers have the same thought as you -- how can I pay down my debt and get on the right track for 2005? Your husband's unfortunate job loss makes this task more challenging and lends itself to your question about debt consolidation services -- also known as consumer credit counselors.

Consumer credit counseling agencies provide two basic services: consolidation loans and consolidation plans. A consolidation loan is a loan that combines and finances payments on other loans, while a consolidation plan is an arrangement in which a debt consolidator facilitates your bill payments and works with your creditors to reduce or eliminate interest and late fees. In the latter scenario, rather than paying each individual creditor, you provide the debt consolidator with one lump-sum payment that they then distribute to each of your creditors each month.

Although these services sound helpful, they may make your situation more complicated and can be costly, so beware. Even though most credit counseling services are "nonprofit," some debt management programs charge set-up fees and/or ongoing processing fees. These fees can range from a monthly charge of $25 to as much as 20 percent to 30 percent of your overall debt. In addition, 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, your interest rate may skyrocket. Stay away from any organization that claims debt consolidation will be "painless," as well as those that claim they can easily clean up your credit report.

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

That said, if you have exhausted these direct avenues and still believe credit counseling and/or debt consolidation would benefit you, be sure to do your research. Look for organizations affiliated with the National Foundation for Credit Counseling (, which is the longest serving national nonprofit credit counseling network in the country. The NFCC is an excellent resource for finding a credit counselor in your area who will insure your financial well-being is top priority.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management ( in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.