Getting Debt Under Control

"Debt" isn't the most attractive word. Usually, we only hear about it when it's a problem — when debt is the name of your financial black hole or when it’s the reason you can't purchase the car or home you want.

Debt can be a useful tool when managed responsibly.  We often incur debt to purchase large items such as homes or cars. This helps ensure that we have necessary cash for other reasons. But it can be easy to reach the tipping point where debt becomes more of a headache than a help.

To understand debt properly, it helps to recognize how we accrue it and how we pay it off. One way is through installment debts, or loans that are paid at a regular time in a specific amount. An example would be an auto loan.

The other way is through revolving credit, which makes a certain amount of money available when you need it. The best example of a revolving line of credit is a credit card.

With any debt scenario, it's always wise to paint a clear picture of where you stand financially and where you hope to stand.

Diagnosing your debt
Unsure if your debt is out of control? Ask yourself the following questions:

  • Do you use one credit card to pay off another? Credit cards are not free money. By using cash advances or running up a balance on one card to pay off another, you risk actually paying more in interest.
  • Do you frequently open new lines of credit? This approach can sometimes seem like it's helping pay off your existing debt, but it can also create even more debt. Applying for each credit card offer you receive can result in higher, unnecessary debt. Stay within the comforts of your budget.
  • Do you pay only the minimum amount on your credit cards each month? This means you're carrying over more debt from month to month — which only gets larger with monthly interest. Try paying off the full balance on your cards each month.
  • Do you make your monthly payments late — or maybe not at all? If you don't have enough cash to pay off any loan or line of credit, you could be spending more than you make. Timely and consistent payments are key to maintaining good credit.
  • Have you "maxed out" at least one credit card? Although some credit card issuers will increase your limit, simply reaching your credit limit can negatively affect your credit score.

If you've answered yes to any of these questions, consider paring down your debt. It's not always easy. And it often requires sacrifices or life changes. But in many cases, it's both doable and liberating.

Consolidating debt
So you have multiple credit cards. And multiple loans. And multiples upon multiples of bills.

Debt consolidation could be an answer. As its name implies, consolidation is the act of transferring multiple debts into one loan with one interest rate and one monthly payment.

Some of the most popular ways to consolidate debt include the following:

  • A low-interest credit card: This tool allows you to wrap the balance from your high-interest credit cards into a new one with a low interest rate. When used properly, this technique can help streamline your monthly payments with one interest rate. If you take this approach, try to stop or at least minimize your use of your other cards.
  • Home equity loans and lines of credit: For homeowners, this type of consolidation is a way to use the equity you've already paid toward your home. By borrowing against this equity at a low interest rate, you can pull together additional funds to pay down credit cards or other debt. This is a second mortgage that's secured by your home, so timely payment is essential if you want to avoid the risk of foreclosure.
  • Debt-consolidation loan: Essentially, this is a personal loan with a low interest rate that can be used to pay down or pay off debt. Numerous debt-consolidation calculators are available online to help find the best loan situation for you.

Remember, in many cases, you're actually taking on more debt or another loan that must be paid off along with your other commitments. Although this could allow you to pay off everything quicker and with fewer interest payments, it is a serious financial obligation that you must manage carefully.

Credit-counseling agencies can help you find a debt-consolidation plan that's right for you, but it pays to be wary of offers that seem too good to be true. They often are. Instead, you might want to consider talking to a financial planner or institution you trust to help you find the best option for you.