Once debt gets out of hand, there's no fixing it unless you pay it off or declare bankruptcy. Whether excessive spending or a spell of bad luck caused the problem, you must find a way to stop charging and pay down the debt. Here's how consolidation can help.

In Spider-Man 3, Peter Parker loses his sense of good judgment after falling under the influence of an alien organism. A similar phenomenon may have happened to you-only instead of an alien, you've fallen victim to your credit cards. In this situation, your best antidote might be a debt consolidation program. Here's how you can spin that web.

Consolidation can help

Debt consolidation is the process of reorganizing your debt so that it's easier to pay off. It works best when you replace your high, variable rate credit card debt with lower, fixed rate debt. With a fixed-rate structure, you know exactly what your payments are, and how many you have to make before the debt is gone. Compare this to the uncertainty of paying down credit card debt: Your balances hardly change from month to month, even though you keep making those minimum payments.

Consolidation usually leaves you with a lower monthly payment as well. When you're feeling the pressure of too much debt, any small relief in your payment obligations will help. And, knowing the payment won't change, you can create a realistic budget for the rest of your monthly expenses. Going forward, that budget will help you lay off the plastic once and for all.

Homeowner options

Taking out a second mortgage on your home is usually the easiest-and most economical-way to consolidate debt. Mortgages are cheaper than other types of loans because they're secured by your home. As a last resort, the lender can always sell your property if you don't pay. Your rate will depend on your credit score-if it's unhealthy, you won't qualify for a great rate-but it may not matter that much. As long as the rate is better than what you're paying on your credit cards, you'll have improved your situation. Some lenders actually specialize in these loans, aptly named bad credit second mortgages.

You can also consolidate by refinancing your first mortgage, but it only makes sense to do this if you qualify for a great rate.

If you don't own a home, you can obtain an unsecured debt consolidation loan. These can be expensive and loaded with fees, so be careful. Shop around and ask a lot of questions.

Debt consolidation and credit scores

Consolidating with a new mortgage or unsecured loan shouldn't radically affect your credit score. If you make your payments as scheduled, your score should actually improve over time.

You don't have to be a superhero to conquer your credit demons. There are really just two requirements necessary to improve your finances: a good plan, and the discipline to stick with it.

Published on June 22, 2007