In a debt crisis? Tips on how to make the consolidation process work for you.

When April Washington, CEO of Baltimore-based Threefold Music Group, was a young, single parent, her poor credit made homeownership seem like an impossible goal.

"I wasn't fiscally responsible or educated in that area; I was late on just about every bill possible." says Washington, who notes that bounced check fees consumed a large portion of her weekly paycheck. Frustrated. Washington consulted Joan Pratt, CPA, and former Baltimore City Comptroller.

"At our first meeting, she took each credit card out of my wallet, all except an American Express card, and threw them away. Every week, I came to her office with my paycheck and bills and she basically showed me how to get out of debt step-by-step," adds Washington, who was able to purchase her first home within a year and a half of that meeting.

For many Americans like Washington, debt consolidation is fast becoming a viable choice to eliminating debt. In fact, a 2005 Chamber of Commerce report shows that minority households and businesses are 6% more likely than their counterparts to opt for debt consolidation to help leverage financial obligations.

Debt consolidation is the replacement of multiple loans with a single monthly payment, often at a lower interest rate, over an extended period of time. But, the only way to protect credit ratings while consolidating debt is to have a plan and stick to it. "You didn't get into debt overnight and you're not going to get out of debt overnight ... but you've got to start somewhere," says Pratt.

Can debt consolidation programs be helpful? Yes, says Tarik Rashad Smith, CEO of California Credit Solutions. But, Smith cautions, they should not replace pre-emptive credit management, such as paying bills on time and maintaining low balances.

Although it can ease your burden, "Debt consolidation is like a Band-Aid, says Smith. "It temporarily heals the wound but can leave scars on your credit history," says Smith, who urges financially-strapped clients to add credit counseling and budgeting to their weekly schedule.

Smith enrolls clients in a bi-weekly consulting program for six months. "We look at their credit report first to determine how much open debt they have and the best plan of attack. Do we pay down four credit cards and close two?" If clients don't see a score improvement, their one-time enrollment fee of $699 is reimbursed.

Before choosing consolidation, understand what's involved. "Debt consolidation is not necessarily risky," says Pratt. "But if you consolidate, find a manageable payment, and then create more debt, that's when you get in trouble."

For example, taking out a 15-year home equity line of credit to pay off $20,000 in debt could cost more than $18,000 in interest. Debt consolidation only works with discipline. Pratt urges clients to first review their budget with a credit counselor; the National Foundation for Credit Counseling's Website (www.nfcc.org) lists local agencies. Bequest free brochures detailing services and fees, which vary widely; setup fees should not exceed $60.

Overall, the goal is to determine total debt, outline a pragmatic monthly commitment, and then set a realistic timetable. Therefore, stay away if you're not serious, Pratt suggests. What's more, Smith, who says his two-year-old credit repair company has a 98% success rate, asserts that living within, not beyond, one's means is the key to eliminating debt and restoring credit. "If you're struggling, surviving off credit will not help; that road is a dead end."

DEBT CONSOLIDATION MYTHS

Myth #1 Debt consolidation loans save you money

Truth: Many of these programs offer you financing with no out-of-pocket fees. What they don't reveal is that they roll the fees into your loan, which is then subject to interest rates.

Myth #2 Debt settlement and debt management are the same

Truth: Debt settlement programs hold your monthly fees until the creditors stop sending notices and agree to negotiate a reduced lump-sum payment. Debt management is having a clear picture of your finances and then creating a plan to deal with debt.

Myth #3 Dealing with an agency is the only way to get out of debt

Truth: You might benefit more from applying for a home equity line, refinancing your mortgage, approaching the credit companies yourself, or seeking credit counseling.