One Big Payment is Not the Answer

When you’re overwhelmed by debt, debt consolidation is often the first solution that comes to mind. Debt consolidation means borrowing money to use to “pay off” existing debts, maybe at a lower interest rate and often for a longer period of time than your original debt terms.

Debt consolidation sounds good in theory, because who wouldn’t prefer to pay $500 per month instead of $1100 per month, even though you’re usually in debt for a longer period? (Or whatever the figures actually come out to be.) But the reality is that consolidating debt can make the situation worse if you’re not careful.

For one thing, it’s a rare person who thinks of debt consolidation for what it actually is: rearranging debts instead of paying off debts.

Usually people are so happy to see those debts “eliminated” that they don’t recognize emotionally that the debts are not really gone. Instead, they’ve just been combined into one big debt.

Of course intellectually you know that you still owe the money, but emotionally you’ll feel as though you’ve paid something off. You may even announce that you’ve paid off your car or credit card. It may sound a little silly written out here, but it’s a common thing to do because you’ll feel such a strong false sense of relief.

Sadly, those emotions mean that you don’t change your behavior. Instead, it’s common to go out and do more of the things you did to get into debt in the first place, and you’re likely to end up deeper in debt than you were originally. Things are even worse if you use a home equity loan to consolidate your debts, because you’ll then owe money against your house (which can be taken away) AND on new credit cards, instead of just owing money on credit cards.

In other words, if you don’t change your behavior, the situation just gets worse.

The thing is, everyone thinks that they will be the exception. Some people really do stick to their new plans, but a lot of people don’t — even though they truly believed they would. It’s similar to the number of people who join a health club right after resolving to lose weight each year because they’ll get a discount if they sign up for a year at once, but then stop going after a month or two. You’re a lot better off doing the regular exercise first, and then paying your health club dues once you’ve shown by your behavior that you are committed to getting in shape.

It works the same way with debt: change the attitude and the behaviors first before looking for ways to save a little money or for shortcuts. And when you get serious about paying off your debts (starting with not borrowing money any more, for any reason) you’ll often pay off them off quickly — a lot faster than you would by consolidating them. Sometimes what appears to be the hardest way turns out to be the easiest.