Will Credit Counseling Affect My Scores?

We thought about an equity loan or line of credit to pay this down, but we really don’t want to take any money out of the house. The equity in our home is the only “retirement fund” we have right now, and we are terrified of messing that up.

We have already cut up the cards except one that has a low fixed rate. Can we contact a nonprofit credit counseling agency and have our interest lowered or eliminated and then pay it a certain amount of money so it can pay the creditors? We see this advertised all the time as the “rescue” solution, but we have heard that this means we will be late on our payments. If we are candidates for this type of assistance, what kind of damage will this do to our credit rating?

A: Credit counseling, by itself, typically doesn’t hurt your credit score. The modern FICO credit scoring formula ignores any reference to credit counseling that might be added to your file.

But some customers who sign up for credit counseling do run the risk of having their payments reported as late if they fall below the required minimum, which sometimes happens under repayment plans.

Other lenders will see the credit counseling notation in your credit file and decide not to lend to you as long as you’re in the program. (That’s usually not such a bad thing; you probably shouldn’t be applying for new loans anyway.) This is why credit counseling isn’t the best solution for people who aren’t already behind on their debts.

What’s more, there are some pretty bad apples in the credit counseling world — outfits that will take your money but won’t necessarily pay off your creditors. If you decide to go this route, you’ll want to stick with agencies that are affiliated with the National Foundation for Credit Counseling (its website: http://www.nfcc.org ).

You have other options, though, and you should explore these first. Your best choice would be a do-it-yourself program that would not only pay off your debt but also whip your money habits into shape so you don’t find yourself in the same position down the road. Some steps to take:

• Stop using credit — period. That includes the card with the “low fixed rate.” There’s no such thing as a true fixed rate anymore, and any day now the issuer could decide to jack it right up. Besides, you can’t get out of a debt hole if you’re still digging.

• Sell whatever you can. That includes the RV if you don’t owe more on the thing than it’s worth. A big yard sale and a few auctions on EBay could result in enough money to make a serious dent on what you owe.

• Ask for lower interest rates. You’re unlikely to get them because you’ve maxed out your cards, but you can always try.

You’re right to be scared of tapping your home equity, especially because you don’t have any other money set aside for retirement. Too many Americans are blowing this all-important source of wealth because they can’t figure out a way to live within their means.

If you’re committed to a debt-free life, however, and have retired your credit cards, then a home equity loan or line of credit can speed you to your goal.