Most people carry some debt, whether from a car loan, a mortgage, or credit cards. Because of that, you might not think much about your level of debt and the impact it has on your bottom line. The truth is, carrying any amount of debt affects your wealth.

Think about it this way: When you charge an item, you’re not paying the dollar amount on the price tag. Unless you pay off that charge in full before the end of the month, you’re paying the price tag plus interest. So, everything you buy on credit is more expensive than you think. Charging items robs you of money you could use somewhere else.

Charging goods and services here and there isn’t a bad thing, right? Maybe not, but charging leads most people down a hole they can’t escape.

How You Fall into Debt

The way you fall into a debt cycle is by spending more money than you bring in. It’s that simple. Overspending is the number one reason people fall into debt, and the reason they stay in debt is also simple. By charging things you can’t afford, you’re adding a bill to your monthly expenses. More bills give you less money to use on other things you need, so you charge more, and before you know it, your credit card bill grows.

Once you fall into this cycle, it’s hard to break free. If you experience a financial windfall that allows you to pay off your debt, that’s one way to climb out of the hole, but that solution is unlikely for most people. That said, there's another solution that doesn’t leave you relying on a big payout that probably won’t arrive.

Escaping the Debt Cycle

Paying the minimum payment on your credit cards or any other debt does little to reduce the outstanding balance. That’s because the interest is still accumulating. Eliminating your debt that way could take years — if you ever pay it off at all.

A better route to explore is through debt consolidation. But before you start your quest for financial freedom, you need to know if debt consolidation is available for you.

What Is Debt Consolidation?

Debt consolidation is a loan that takes all your outstanding debt and lumps it under one umbrella. That means you’ll have one interest rate and one monthly payment to chip away at your debt balance.

But if you carry a lot of credit card debt, why would you want to add another loan?

When you take out a debt consolidation loan, you replace multiple payments with a single one. Although it doesn’t reduce your total debt amount, the loan usually has a more reasonable monthly payment amount. Those who offer this debt consolidation can do this because they stretch the loan's life over an extended period, which reduces your monthly bill.

Plus, you might secure a better interest rate than you have on your other loans, and that could save you money in the long run.

Who Offers Debt Consolidation?

If you think consolidating your debt is the answer you’re looking for, there are a few places you can go to inquire about a loan. Most credit unions and banks offer debt consolidation, and there are also specialized companies that offer these services.

In order to qualify for a debt consolidation loan, you usually need a decent credit score because the lender wants to know that they have a good chance of receiving their money back in the future. The best time to approach a lender for this type of loan is while you’re still in good standing with your current lenders. If you wait until you’ve missed some payments, your credit score might dip to a point where you don’t qualify for a consolidation loan.

But just because you can qualify for a consolidation loan doesn’t mean that everyone should take one.

Who Should Use Debt Consolidation?

Before you take a debt consolidation loan, look at your outstanding debt. See if the debt consolidation loan puts you in a better financial scenario. For instance, if your loans' interest rates are lower than the one you can get with debt consolidation, a new loan might be a bad idea.

On the other hand, if a debt consolidation loan lowers your monthly payment and frees up more cash, maybe you should consider it. Even if you pay a slightly higher interest rate, perhaps you could use the extra money to double up the payment and eliminate your debt faster.

And the great news is, if you pay your debt consolidation loan payments on time, they can help increase your credit score.

Whatever you decide to do with your outstanding debt, one thing is for sure: If you continue to overspend, your debt will continue to grow.

Using Debt Consolidation to Stay out of Debt

It’s one thing to commit to debt elimination, but you need to solve the issue that landed you in debt in the first place. Consolidating your debt is only one piece of the puzzle. To keep yourself from falling into another spiral, you have two choices: increase your income or reduce your expenses.

A few ideas to increase your income include:

  • Requesting a raise
  • Making a lateral move within your company to a higher paying position
  • Getting a side job
  • Advancing your education to land a higher paying career

While you work on increasing your income, reduce your expenses at the same time. One quick way to do this is by looking at all of your bills and contacting the companies to ask for a lower amount. For those who won’t reduce payments, consider whether you can eliminate the service altogether.

Cutting expenses isn’t going to make you rich, but it might buy you time to cover your bills while you work on increasing your income.

Live Within Your Means

When you get that higher-paying position, don’t increase your expenses to match. It might be tempting to splurge when you see your paycheck, but it's important to resist the urge. You want to make enough money to cover your costs with a little leftover for savings or investing. Some say to live within your means, but a better idea is to live below your means and let the extra money work for you.

Ultimately, you want interest that increases your bank account instead of decreasing it.

Debt Consolidation Is a Tool

Just because you find yourself in debt doesn’t mean you have to stay there, and consolidation could be one way out. Before you decide to lump your debt together, read the terms, do some calculations, and make sure the move puts you in a favorable financial spot.

And while you’re climbing out of debt, reposition yourself financially, so once your debt is gone, you can keep it that way.