If you’re not careful in your debt-consolidation plan to bundle your debts for a lower interest rate and minimum payments, you might get into more financial problems.

It’s common for businesspeople and consumers to want to package several debts – car loans, a line of credit, credit cards and student loans – into a debt-consolidation plan.

Here’s the rub: People in financial trouble are desperate to solve their cash flow issues. But debt consolidation is basically just a temporary, cosmetic fix.

Why? The debts remain.

If you own a business, there might even better options (they and credit solutions are down in the Coach’s Corner at the end of this article.)

But if you want to pursue debt consolidation, you are cautioned to be very careful or your financial problems will worsen.

Here are the steps you must take:

1. Recognize and admit the cause of your problems

Your expenses are unmanageable. Worse, a debt consolidation scheme simply does not deal with the reasons for your demise.

You must examine your lifestyle. Track your spending. Decide between what you want and what you really need.

Change your spending habits, and make what seem to you as making sacrifices – whether your living expenses are too high or you’re overspending on luxuries.

Unless you’re serious about changing your spending habits, a professional debt-consolidator can’t help you.

2. Research your best choices

Your options include obtaining a secured or unsecured loan, transferring your debt into a line of credit or making a balance transfer to a low-interest credit card.

You might also have to consider debt settlement options – settling a debt for an amount that’s less than you owe. A for-profit debt settlement company can negotiate with your creditors for a percentage fee of your forgiven debt.

A credit counselor can help you with a debt-management plan — among your creditors, a nonprofit counseling organization and you.

The counselor will work out a longer repayment duration or lower interest rate. You send money to the counseling firm that’s applied to the balance and pay the firm a fee.

Be careful in considering debt settlements or a debt-management plan. You must fully understand the agreement terms.

Depending on your situation, there are pros and cons to consider. They always involve money.

Even if you just transfer your balance to a low-interest credit card, don’t opt for a low interest that will expire when the promotion period expires. Also, beware of the balance transfer charges.

If you decide on a low-monthly repayment plan, chances are your payments won’t decrease the principal.

So list all your debts, call your creditors to negotiate lower interest rates. Explain your situation and you might create some luck.

If you go into the consolidation route, do your homework. Look out for fees and interest rates that will increase over time.

3. Strategize – consolidate the right debts

Don’t make the mistake of rolling favorable low-interest rates into a consolidation plan.

In other words, if you include low-interest debts in a consolidation, you’ll find yourself paying higher interest rates on debts that should have been left alone.

For example, student loans have rates that are lower than your other debts. Bear in mind you can’t consolidate federal student loans once you’re in default.

If you have student loan issues, there are five solutions to ease the pain of your student loan debt.

So pay off the high interest debts and omit the low-interest debts – pay them off separately.

4. Pick the right people to help you

Caution: The behaviors and reputations of many debt-settlement companies are no better than most debt-collection companies.

For-profit debt-settlement companies don’t always act in your best interest. For instance, they’re known for not making payments as part of a scheme to force your creditors to accept a deal. Such practices hurt your credit score.

Such firms often charge fees before they do any work that might or might not help your situation.

Even the nonprofit credit counseling firms aren’t always effective. They often deliver unsatisfactory results.

So before you hire anyone to help you, do your research. Read the firm’s Web site, thoroughly read all its online reviews and check with the Better Business Bureau. Avoid any company that is too aggressive in sales.

The more dependable nonprofit credit counseling firms usually belong to the National Foundation for Credit Counseling or the Financial Counseling Association of America. Their counselors are certified and they must adhere to industry standards.

Be sure to check out their track records and fees. Make certain you feel comfortable with the counselor with whom you’ll be working.

5. Refrain from using your new cards

Once you feel the pressure is off, stay vigilant. You’re not out of danger. Don’t start spending again.

You still have a ton of debt to repay. So get rid of all temptation. Cut up your credit cards. Only use a credit card with a low interest rate and low limit.

You’ll also minimize the risk of identity theft.

6. Make a plan and stay with it

Even if you’re getting professional help and decide on a plan, you need to stay at it. What if you have sudden unexpected expenses?

Create a budget that meets your spending goals. Plan to live within your means and save for emergencies.

From the Coach’s Corner, here are related tips:

Step-by-Step Solutions for a Financial Turnaround — Difficult economic conditions have exacerbated the financial woes facing many businesses. But business success is possible for companies suffering through red ink. Here are financial solutions that will help facilitate a company turnaround.

Overcoming Obstacles for Business Turnaround — 13 Steps — For a successful turnaround of financially troubled businesses, there are usually two obstacles to overcome. They include the ego of the business owner or CEO, and poor advice by the lawyers. It’s difficult for a business owner or CEO to accept the need for a turnaround specialist.

Tips to Get the Lowest-cost Small Business Loan — Small business owners are facing unnecessary financial risks because they increasingly seek debt consolidation and loan refinancing as the result of high interest rates and onerous fees, according to a small-business lender. Here’s what to do.

How to Buy Real Estate with Little or Bad Credit — You want to buy real estate, but you have little or bad credit? Take heart. I believe some people, who have extenuating circumstances, deserve to buy property in unconventional situations. That includes those who are credit-challenged – as long as they are honest, and can and will keep their financial obligations.

If Your Credit Report Has Errors, You Have Options — So, the credit industry denies that it’s possible, but the Federal Trade Commission (FTC) reported 20 percent of surveyed consumers complain of errors on their credit reports. Of course, good credit is important for consumers and businesses.

“Rather go to bed without dinner than to rise in debt.”

-Benjamin Franklin


Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.