Problem debt requires a multifaceted solution

The problem of owing more money than you can afford to repay is a complicated one and complicated problems often have complicated solutions. It would be nice if there were a simple way to do away with $50,000 in credit card bills when you only earn $25,000 per year, but it isn’t always that easy. The simple solution that is often thrown out is to suggest “debt consolidation”, as though combining several bills into one will automatically solve the problem. It may, but in all likelihood, your problem is bigger than that.

Debt consolidation is the process of taking several large loans, often issued at high interest rates, such as credit card debt, and combining it into one larger loan, preferably at a lower interest rate. There are some advantages to this; the lower rate will save some money in interest and the minimum payment due on the loan will probably be less than the sum of the minimum payments on all of the loans it replaced. That doesn’t mean that consolidating is necessarily the answer to the problem. 

Consolidation necessarily involves those with too many loans taking out yet another one. Making matters worse, in order to lower the payment to a point where the debtor can afford to make payments, the repayment schedule often needs to be extended. That reduces the monthly payment, but increases the overall amount of interest to be repaid.

The best solution to eliminating a debt problem is a multifaceted attack that may or may not include consolidation:

• Make a budget - Start by seeing how much money you take in and how much money you must spend each month. Must means necessities, not luxuries. It’s the mortgage and the lights and the car payment. Add those up and see how much remains and you will have some idea of how much you can spend to repay your bills.
• Get help - Credit counseling agencies can help you take a look at the “big picture” and can assist you with learning to handle the money you have in a more efficient way. They may also be able to negotiate your interest rates with your creditors, but you can probably do that yourself. Just call them and ask them if they can lower your interest rates. Every little bit helps.
• Sort your bills by interest rate - Pay as much over the minimum as you can on whatever loan you have that has the highest interest rate. Pay the minimums on the others. Once that bill is paid off, do the same with the bill that you have with the second highest rate, and so on.

It may be possible to consolidate your debts with a single loan that replaces all of your other ones, but it isn’t a magic bullet that will solve all problems. The problem isn’t debt, it’s money management. As soon as you learn to handle your money better, you can take a reasonable approach to reducing your obligations.

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