The Pros

• Lower Monthly Payment – This is the line that hooks most people to the idea of credit card consolidation. If you’re paying $1000 per month, and a company offers you $500, it’s hard to not think that’s a great deal.

• Lower Interest Rate – Especially if you’re going with a secured loan, debt consolidation can give you a much better interest rate on your debt. With a secured loan, you will use your house, car, or bank account as collateral.

• One Monthly Payment – Instead of paying various creditors, you will only need to worry about paying one. It’s easy to keep track of payments and hard to forget about.

The Cons

• The Risk of More Debt – When you choose to consolidate your credit card debt, your burden of debt may feel lighter. Because you feel less burdened by debt, you may be more likely to using your credit cards again, and dig yourself deeper into debt.

• Lose Your Home or Car – If you used your home or car as a security, and find yourself unable to pay back your loan, you can lose your personal property. Be careful, many debt consolidation loans are in fact home equity loans.

• One Monthly Payment – If you have a credit card debt with a higher interest rate, it may be best to pay that off sooner than those with lower interest rates. However, when you consolidate your debt, you cannot accelerate the payoff of one credit card over the other.

• More Money In the Long Run – Although many debt consolidators promise to lower your payments by significant amounts, you term of payment may lengthen. When all is said and done, you could end up paying more.

• You Can Do It On Your Own – Debt consolidation companies are middlemen between you and your debt. Instead of paying them on average 10% of your monthly payment, not to mention the enrollment fees, you can direct that cash toward the debt.

What Does It All Mean?

Debt consolidation may seem like the easiest solution to your problems, but at the end, it’s actually just another gimmick that profits off of you. Consolidation does not remedy the problem, it actually makes your debt worse. If you use a debt consolidator, you are paying them to hold your money for a period of time until your credit card companies give up hope of ever seeing their money from you. Then, the consolidator negotiates a deal with your credit card company, who inevitably accepts. In the meantime, your credit rating lowers. Worse yet, creditors may show derogatory information about you on your official credit score, further damaging your good standing.

For those who choose to use home equity loans, understand the risks before making the leap. Any unforeseen event (an unexpected pregnancy, an illness, a layoff) can throw off balance your carefully orchaestrated finances, leaving your house at risk. If you must take out a secured loan, consider using your car as collateral. Although no one wants to end up in the worst case scenario, it’s cheaper to replace a car than a house.

Photo by Andreas Rueda

Perpetual credit card debt is an affliction that haunts consumers around the world. While the theory behind credit cards sounds simple—buy things now and pay later—many families are often led into financial ruin because they are unable to manage their debt properly.

For some, it may be better to never even own a credit card at all. Paying for everything with cash seems to chase all debt worries away. However, if you are already drowning under your credit card debt, you need a way to systematically attack the debt. Since “money problems” are the most common things for couples to fight over, eliminating your debt may save your sanity as well your money.

The Solution—Debt Snowball Method

While some people may be able to pay off their debt without a specific plan, the majority of us need to take a systematic approach to eliminating our debt. One of the most effective ways is the Debt Snowball method propagated by Dave Ramsey, a popular syndicated personal finance author and radio host based in the United States. The list below is a step-by-step guide on how to systematically pay off your credit card debt the Dave Ramsey way:

1. Assemble a list of all of your debts, arranged from smallest to largest
2. Continue to pay the minimum payments on all debts except for the smallest debt. For this one, apply all the money you can find to tackling this small debt. Pay as much as you can per month to get rid of this nagging bill.
3. Once you have paid off the smallest debt and won your first battle, take the money you were applying to the smallest debt and use it to attack the next largest debt, which will now be your smallest.
4. Again, continue to pay as much as you can on the new smallest debt, while paying minimum payments on the others. Each time you pay off one bill, you will be able to apply more and more to the next debt. This is where the debt snowball method gets its name— the amount of money that you apply to each debt grows and grows like rolling snowball picking up more snow.
5. Continue the debt snowball until you pay off all of your debts. Then, switch the snowball focus from paying off your debt to investing. By the end of this step, you should have your debts paid off (except for maybe your house) and be investing every month.

Another, very similar approach is to pay off your credit card debts according to the interest rates. However, while this may save a little money in the long run, it is often more difficult to get started when the highest interest rate debt is a very large one. Many people feel like they are not achieving anything and decide to quit. By implementing the debt snowball, you can see fast results and get the psychological motivation to continue!

Quick Tip

One way to achieve results even more quickly is to engage in debt negotiation. By working with your credit card company, you may be able to pay off only a percentage of the total debt you owe. Read here how to engage in Do-It-Yourself Debt Negotiation.

The Catch

Of course, going through all these steps won’t help you in the long term if you don’t change your spending habits. The key to becoming and staying debt free is to understand the risks involved with credit cards, and how to use them wisely. After you eliminate your debt, be sure to understand how you got into debt, and how you can stay out by altering your current spending patterns.

Photo by Andreas Rueda