Considering your consolidation options -- Page 2

If you're consolidating because you're in financial trouble, liquidate other assets first says Ric Edelman, author of "Financial Security in Troubled Times." "You should not have money in assets if you also owe money in debt," he says. Three exceptions: mortgages, car loans and student loans.

But Bogosian disagrees. "Never use an appreciating asset to get rid of a depreciating asset," he says, adding that he'd tap life insurance first, if possible.

Bottom line: Weigh the options carefully and do what will work best for you. And shop carefully.

What kind of consolidation loan should you tap?
If you have a plan for whittling down your debt and consolidation is part of it, what options should you tap? That depends on who you ask.

Rolling a handful of high-rate credit cards into one or two with better terms "works for people who have a certain amount of debt but aren't in the red zone," says Travis Plunkett, legislative director, Consumer Federation of America, a nonprofit advocacy group.

To avoid being late with payments, set up an automatic bank draft or e-bill payments to cover the minimums, says Howard.

Many financial advisers will caution against taking out a loan with the house as collateral, even if you're doing well financially. Others don't want to see consumers robbing their futures (retirement accounts) to get out of trouble now. And some believe it's a big mistake to trade asset producing accounts (like investments) to pay off debt.

Last year, 44 percent of consumers taking out home equity loans and 35 percent of those tapping home equity lines of credit used the proceeds to consolidate debt, according to figures from the Consumer Bankers Association. And the amount consumers accessed with cash-out refinancing shot from $26 billion in 2000 to $138 billion in 2003, according to figures from Freddie Mac. But consumers may be making a big mistake in tying their debts to their homes, according to several money experts.

If you're already in financial hot water, you've got to be more careful in choosing a method to consolidate your debt. When you're already having problems making your payments, you never want to take out a loan or line of credit against your home. "That's playing with fire," says Howard.

Edelman agrees. "You're in debt because you bought too many sweaters with your Visa card," he says. "There's nothing Visa can do about that. But once you tie your house to that, you can lose your house."

And too many people return to their old spending habits. "You're likely to build the debt back up again, only this time you won't have the equity to bail you out," Edelman says.

Look at your situation and protect what's most important for you and your family. Sometimes making some cutbacks (cable, shopping, etc.) and putting the extra money toward bills will be enough. You may decide to tap savings or investment accounts, rather than add more debt with a loan. And you might want to get some advice from a financial planner or debt counselor.

When it comes to debt counselors, "there are two kinds: nice ones and bad ones," says Hampel. "As long as you pick a good one, you're OK." His advice: stay away from the ones who advertise on late night TV.

Going on a debt management program at a credit counseling center "almost always has a negative effect on the consumer's [credit] score," says Ulzheimer. Just how much "is a crap-shoot," he says. But if your score is already bad, it's not going to make that much of a difference.

If you're deciding between consolidation options, rank your financial priorities. Which assets are vital to your survival and untouchable? Which can you live without? If the house is more important than the retirement account, you might decide that if you go for a loan, that's what you'll tap. But if your job is iffy, your health is good and that old life insurance policy is just gathering dust, selling or borrowing against it might be the best option for you.

If your consolidation is an attempt to stave off bankruptcy, you don't want to do anything that would make things worse if you do have to file later. In most cases, certain assets, like homes and 401(k) accounts, are protected in bankruptcy. If your creditors can't touch them in a situation as dire as bankruptcy, do you really want to hand them over now?

Whichever solution you choose is likely to cost you something somewhere. So if you decide on a consolidation option, shop carefully. With loans and credit, get at least three quotes. Look at a variety of venders. Banks, credit unions and finance companies may see you differently. With a bank, you could have an ongoing relationship, which could help you. Credit unions tend to give a better break on rates and fees. And finance companies sometimes market themselves to consumers with flawed credit.

But too many times, consumers are grasping at options that will only make things worse. "A lot of debt consolidation loans are really home equity loans or second mortgages," Plunkett says. And even borrowers who don't own a home have to be savvy so they don't get lulled into a bad consolidation deal, he says.

And don't act out of fear or stress. A couple of late payments on credit cards might screw up your credit for a while, but it won't kill you. Keep a roof over your head, food on the table, the power on and the health insurance paid. Everything else is negotiable.

"A lot of times, when you're offered these debt consolidation loans, oftentimes you're so anxious to get instant relief that you're not even being a savvy consumer and considering what would be the best terms for you," says Mark.

Some of the options consumers will see "don't even pass the smell test," says Bogosian. "Use your common sense."

Dana Dratch is a freelance writer based in Atlanta.