What to know before turning to a debt eraser

Your questions answered: In this weekly personal finance segment on The First Trade, we answer audience questions from our Money Mailbag.

Q: Will going to a ‘debt eraser’ affect my credit score? Does having my debt negotiated down ruin my score? – Gerri

It’s a great question, especially for those in debt who think their options are limited. But most financial advisors will advise against going this route because there are so many shady debt consolidation programs that can cause you more pain than relief. Not only will you end up owing the “debt eraser” a hefty fee for working with your creditors, but the payment plan they negotiate on your behalf could end up costing you more down the line. Your monthly payments might be lower, but you could be committed to a longer payment plan.

We understand that reaching out directly to your lenders can be a daunting task (especially if you’re not in good standing with your loan) but it’s in their best interest to work out a plan with you and get some sort of payment rather than selling your loan to debt buyers for pennies on the dollar. In other words, you can work on erasing the debt yourself because you have more control over the process than you may realize.

A solid first step you can take is to reach out to non-profit credit counseling service like the National Foundation for Credit Counseling, that’ll offer you a free consultation, and continue to work with you for a minimal fee to review your credit, and develop a personalized debt-management plan.

Your credit score will take a hit -- how much will depend on whether you’re going to refinance your loans, negotiate with your lender directly, or go the more drastic route of filing for bankruptcy. But no matter what you do, you need to mitigate your risk by doing your homework on the organization or advisor you’re working with.

For the thousands of federal employees who are not getting paid and scrambling to borrow money to get by, your debt could be more difficult than ever to manage. The good news is that banks and credit card companies have been accommodating for those affected by the government shutdown. Plenty of banks and credit unions are offering 0% interest offers for 60 days, in addition, to low-interest rate loans and cash-advances. Bigger financial institutions like Wells Fargo and Bank of America are also waiving overdraft fees.

If you have a question you need answered, send it our way at moneyquestions@yahoo.com and we might just feature it right here on Yahoo Finance.