Should I trust credit-counseling agencies?

Q: Can you tell me if debt consolidation organizations are OK? What are the pros and cons?

A: In general, debt consolidation is when you combine multiple debts into a single debt. For example, if you have multiple credit cards, student loans, and some medical debt, you could take out a loan to pay off all those balances at once.

Pros: One advantage to debt consolidation is that it gives you the convenience of paying one creditor each month instead of many. In addition, it's possible to pay a lower interest rate, particularly if you own equity in a home. The interest rate on a home equity loan can be significantly less than on other types of credit (such as credit cards). So, paying off creditors with the proceeds from a home equity loan and then paying the lower rate is one way to free up more resources to get out of debt.

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Cons: Be careful. The danger is you can easily find yourself falling even deeper into debt. Basically, the loan will open up lines of credit that have been closed. Now that they're open, you may be tempted to resume poor spending habits. Also, with only one monthly payment instead of several, you may have the misconception that you are managing your debt better. You could soon increase the debt you had before the loan. If you've taken out a home equity loan, you've put your home at risk.

The upshot: Debt-consolidation companies are businesses that specialize in granting loans that pay off consumers' debts. Once again, be careful. Frequently, these companies' loans are offered at high interest rates with hefty late fees. The terms of the loans can be buried in fine print and hard to understand. The companies may pose as "nonprofit" credit counseling agencies that recommend you take out a loan, whether or not it's appropriate for you. Watch out if you think you're getting one service but then are offered another. Reputable credit counseling agencies will offer to help you restructure your debt, but they won't offer loans.

If you decide a debt consolidation loan is right for you, shop around carefully and compare your options. Make sure that the terms and fees of a loan are favorable. And even if they are, you have to be committed to paying off your debt and disciplined in your spending. If you want a debt-consolidation loan only to free up your lines of credit, eventually you could find yourself in even greater debt — with no credit at all.

Jean Chatzky’s Bottom Line
This week: Naming a guardian for your children
If you're a parent, naming guardians for your children is a tough but necessary decision. So sit down at the kitchen table with your spouse, a pencil and paper (and a pint of Ben & Jerry's if you need it for strength), and list everyone who could possibly fill the role. Then, using the following criteria, start evaluating:

Health. You want someone who will live for many years and who is in good overall physical condition. Siblings, for this reason, are probably better choices than your parents.

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Resources. The person you choose should have the time and (if your child won't be financially self-sufficient) the money to handle the responsibility.

Like mind. You want someone who shares your views on education, religion, and other things that matter to you.

Geographical desirability. Choosing someone who lives nearby is a plus — moving a child after they've just lost one or both parents makes a difficult time even more stressful.

One vs. two. Because of the high divorce rate, if you're inclined to choose a married couple — for example, your sister and her husband — many estate planners advise naming just one of them or both, contingent upon the fact that they're still married.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," will be released in September. Copyright ©2004. For more information, go to her Web site, www.JeanChatzky.com.

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