Legitimate credit counseling agencies can help you come up with a plan to repair your credit, which often involves consolidating debt. The agencies themselves can consolidate the debt, or you can choose other options. MSN Money warns that you have to be careful when choosing a debt consolidation option because many debt consolidation companies have earned a reputation for ripping clients off. Keep in mind, repairing credit takes time.
Credit Counseling
The two organizations through which MSN Money recommends consumers seek a credit counseling agency include the Association of Independent Consumer Credit Counseling Agencies and the National Federation for Credit Counseling (see Resources). These organizations generally give the initial counseling session free, interviewing the client in person or by phone or email to learn about his income, expenses, debts and spending habits. From this, they create a plan for getting out of debt. Counselors with these organizations are certified and have a commitment to work with clients regardless of their ability to pay for any services.
Debt Management Plan
Consumers can choose to participate in a debt management plan (DMP) with the agency. With a DMP, the counselor and consumer create a budget and allot a portion of money each month for the consumer to give the counselor to pay the consumer's unsecured debts, such as credit cards. In effect, this is a debt consolidation plan since the consumer only has one payment each month. This might include a small fee of up to $50 a month for the agent to handle the client's bills.
Other Debt Consolidation
Even after getting counseling from a credit counseling agency, a consumer may choose to consolidate his debt himself. He can apply for a consumer installment loan to pay the debts, leaving him with a standard monthly payment with interest that remains the same. He may borrow money from his home equity or his 401k plan to pay the debts. MSN Money warns against using debt consolidation agencies. Many have gained bad reputations for maneuvers such as collecting their fees from the customer and delaying paying customer's creditors, further hurting the client's credit score.
How it Impacts Your Score
Credit repair takes time, but some strategies are faster than others. Consolidating credit card debt with installment loans, home equity or 401k loans can repair credit fast because the credit scoring system does not penalize those kinds of debt as much as credit cards. But with newly unencumbered cards, you risk racking up more debt. Also home equity or 401k loans can jeopardize your home or retirement. Working with a DMP can ding your credit because creditors note they're now dealing with an agency, and the agency often negotiates down interest and fees so you're not paying the debt as agreed. This can hurt your credit in the short run.
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