Consumer debt is a common topic of discussion and analysis, but how can consumers get their debts under control? Household debt peaked at $3.40 trillion in the United States at the end of March 2016, not including mortgages debt, according to the Federal Reserve Bank of New York.

For an ever-growing number of them, the answer is debt consolidation. In this article, we show how consolidation can help - and why it often fails.

Tutorial: Budgeting Basics

The Ideal Process

Debt consolidation basically involves taking all of your debts and moving them to a single source. This often includes personal and home-equity loans, car payments, credit card balances and mortgage debt.

Most brick-and-mortar lending institutions offer a variety of debt consolidation options. Online vendors also provide a vast selection of programs and a convenient medium for comparing them against each other. When it is done properly, debt consolidation results in a lower interest payment, a lower monthly debt payment and an increased amount of discretionary income each month.

Ideally, the lower payment and reduced interest provided by debt consolidation free up enough income to enable you to live within your means. Once you can afford to make the monthly payment on your loan, you can make extra payments and begin to retire your loan as quickly as possible.

The Reality of Debt Consolidation

While there are a number of financially savvy individuals who use debt consolidation as a tool to manage their finances, this is not typically the case. For most consumers, the need to engage in debt consolidation is a sign that they have been doing a poor job of managing their money.

If they weren't, it isn't likely that they would be so deeply in debt in the first place.

And immediately after consolidating, many of these individuals no longer feel pressured by their inability to pay their debts, so they go on a spending spree. Their previously maxed-out credit cards now have zero balances and, often, these consumers can't resist the urge to shop.

In short order, many people who consolidate their debt go on to rack up so much additional debt on their credit cards that all of their newfound money is once again needed to make credit card payments. In other words, instead of using debt consolidation to reduce indebtedness, consumers are simply using it to dig themselves a deeper hole. (To read more, check out Home-Equity Loans: The Costs and The Home-Equity Loan: What It Is And How It Works.)

Change Your Behavior

Debt consolidation is the first step toward getting your bills under control, but changing your behavior is an equally critical part of the equation. In order for debt consolidation to have a meaningful and lasting impact on your financial situation, you need to break the debt cycle and stop spending money that you haven't earned yet.

One of the easiest ways to minimize your spending is the elimination of your credit cards. Credit card abuse is one of the leading causes of consumer indebtedness.

Another easy step is to put a moratorium on new loans. Your debt consolidation loan was taken in order to get your debts under control. Taking out additional loans is counterproductive. Keep in mind that "loans" include any scenario where you are racking up bills that require repayment at some point in the future. This includes the purchase of new automobiles and the purchase of items that offer no payment and no interest for a predetermined amount of time. (For more tips, see Take Control Of Your Credit Cards, Understanding Credit Card Interest and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)

The Bottom Line

Minimizing debts is critical to the long-term success of debt consolidation. Financial experts often note that your outstanding debts, including credit cards and mortgage payments, should not amount to more than 36% of your gross monthly income.

That 36% figure is often referred to as a debt-to-income ratio. The ratio is calculated by dividing the amount of money you spend each month to service your debts by the amount of your income. When they do the math, people are often surprised to discover that their debt-to-income ratios are significantly higher than the recommended amount. Determining your debt-to-income ratio provides an excellent reminder that you aren\'t supposed to live paycheck to paycheck, spending every single dollar that you bring in each month.

If you find yourself in financial trouble, use debt consolidation as a tool to get your finances back on track, and then use good spending habits to keep your bankbook in the black.

For additional information about sound ways to manage your money, see The Beauty of Budgeting, Seven Common Financial Mistakes and The Indiana Jones Guide To Getting Ahead.

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