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When people get overwhelmed by debt, often debt consolidation is the first thing they think of to resolve the situation. Debt consolidation means that people borrow a large amount of money to use to pay off their existing debts, maybe at a lower interest rate and often for a longer period of time than their original loans.

It sounds good in theory, because who wouldn’t prefer to pay $500 per month instead of $1100 per month? (Or whatever the figures actually come out to be.) But the reality is that consolidating debt can make the situation worse if they’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. They’re so happy to see those credit card debts “gone” that they don’t recognize emotionally that they’re not really gone. Instead, they’ve just been moved. That’s the definition of consolidation: combining multiple things into one. Of course they know intellectually that they still owe the money, but emotionally they feel as though they have paid something off.

They feel a sense of relief instead of stress about owing the money and paying the bills, which can result in them going out and doing more of the things they did to get into debt in the first place. So they end up deeper in debt than they were originally. This is even worse if they used a home equity loan to consolidate their debts. They end up owing money against their house (which can be taken away) AND on new credit cards, instead of just owing money on credit cards.

If they don’t change their 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 to me it seems similar to the number of people who resolve to lose weight each year. Do the regular exercise first, then pay a year of your health club dues in advance. In other words, change the attitude and the behaviors first before looking for ways to save a little money or for shortcuts.

People who get serious about paying off their debts (starting with not borrowing money any more, for any reason) often pay off their debts a lot faster than they would by consolidating them. Sometimes the hardest way turns out to be the easiest.

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