From college loans to car payments to credit cards, most of us have to take on debt at some point. When you are getting started, some level of debt is actually okay. You may need to take on a small amount of debt to create a favorable credit history in order to rent an apartment or apply for a loan. The key is to maintain a manageable level of debt, one you can easily afford and quickly pay off, because interest adds up fast.

Most people don't even realize that they are in trouble until they get too deep in debt. All those credit card offers you receive in mail could be your ticket to a disaster if you don't plan your financial life. But what you do when you realize that you're too deep in debt and want to get out. Is bankruptcy is your only option? Answer to that question depends on individual circumstances.

But let's say that you've already decided that you're not filing for bankruptcy. That means only one thing. You will have to figure out a way to pay this debt back.

This article deals with some of the important aspect of debt consolidation and debt management. It also deals with something more important - fiscal management.

First of all, if you're going to do debt consolidation, make sure you understand everything that's told to you. You also want everything in writing so that there are no issues down the road. If you've multiple credit cards, you could move high interest balance from one card. However, pay close attention to balance transfer fees and terms of transfer.

Actual Cost of Debt

When you make purchases that put you into debt, you're not using your own money. You're borrowing money that must be repaid, along with interest. How much does that ends up costing you? Take a look at the true cost of paying off $10,000 in credit card debt.

Example 1
To pay debt off in 5 years with 12.5% interest rate, your total payments will be $13,498.80. That's one heck of a return on investment. Unfortunately this return is for Credit card company to enjoy.

Example 2 - You have $20,000 in credit card debt at 15%, so you're paying $3000 per year in interest. This translates to $250 per month. Now if you are thinking moving this balance to another card with 3% balance transfer fee and 10% rate.

Let's run some numbers -
Balance transfer fee = 3% of balance = 3% of $20,000 = $ 600
yearly interest for 10% rate = $ 2000
So in one year, your total payment will be $2000 + $600 = $2600

Remember you're paying $3000 with your current card, so switching will save you $3000 - $2600 = $400 in just interests

Based on these calculations, it makes sense to transfer the balance. But here is the trick. What if 10% rate offered on the second card is just one year promotional rate and it jumps to 29.99% after a year? Well, you know the answer, you're not likely to pay off $20,000 in one year and that's what second credit card company is counting on. They could even waive the balance transfer fee to get you in. But once your first year is up, you're in bigger trouble because of a new 29.99% rate.
Bottom line - read the terms of transfer very carefully and if promotional rate is not extended for the life term of balance, you probably should not take it.

In situations like this, best idea is to call the credit card company and ask for another offer that has a fixed rate until balance is paid in full. You will be surprised to see how many time a credit card company is willing to do this. Credit card business is one of the most competitive one and credit card companies will do anything to keep their customers or get a new one.

You will also need to address the root cause of your debt. If your spending habits have not changed, moving balance from one card to another will not help. Rolling your credit card debt into a home equity loan is also a terrible idea if your spending habits are not changing. Reason is very simple, once you have the debt moved off your credit cards, you're ready to use them again and don't see that huge home equity loan sitting on your house. You might end up worse off than when you started.

You could also go to a credit counseling service. They can usually negotiate better rates with your creditors, but most of them charge a service fee, too. So you might be better trying to negotiate by yourself first. If you do go with a counseling service, make sure you understand their fee structure, so you understand what portion of your payment will go towards paying down debt. Don't assume that service is free because it says it is "Non Profit". They are not generating profits but still have to pay to run the operations(salaries, building costs etc).

Debt can slowly build and accumulate until it becomes a serious issue.

Your debt may be out of control if:

You're living paycheck to paycheck.
You have balances on several credit cards or other installment loans.
Your credit cards and other installment loans charge high rates of interest.
You worry about being able to pay your bills.
You can only afford to pay the minimum amount due on your credit cards each month.
Your monthly debt load exceeds 36% of your gross monthly income.

Ways to Reduce Debt

If you are paying off a range of credit cards and store cards, pay off those with the highest rate of interest first.
Consolidate credit card debt on one low interest rate card.
Pay more than the minimum payment each month.
Avoid temptation by leaving your credit card at home.
Stay away from store cards unless you can pay off your balance within the interest-free period.
If you have a variable rate mortgage, look into whether refinancing to a fixed rate can save you money in the long run.