Debt Reduction: Don't Confuse Activity for Outcome

If you ask most people how to get out of debt, they'll tell you to do a balance transfer or take out a home equity consolidation loan. The logic of these techniques seems clear enough -- if you can lower your interest rates, this will lower your payments and leave more money to pay off debt.

Sounds simple enough, but these common techniques suffer from a fatal flaw -- they leave the borrower feeling like they've made progress when, in reality, they've merely shifted the chairs around on the deck of the Titanic.

To understand why these techniques often fail, it's important to learn the principles that truly help borrowers get out of debt:

  1. You can't get out of debt if you continue to charge on credit cards.
  2. You must have a debt-reduction plan that you can follow and track progress. 
  3. If your finances are complicated, it's very hard to see if you're reducing debt.

Keeping these principles in mind, let's see why the standard techniques may actually make it harder for you to actually make progress.

Balance TransfersBecky and Jim (not their real names) make good income as a physician's assistant and nurse in a suburb of Chicago. Between the two of them they ran up nearly $110,000 on 11 credit cards and were considering bankruptcy. A year later they had $140,000 in debt on 16 cards. What happened? According to Becky, "'We tried balance transferring between credit cards and just lost track of where we were."

Consolidation LoansSimilar to balance transfers, consolidation loans transfer high-interest debt to lower-interest secured debt. But, shifting balances doesn't solve the underlying spending problems that led to high credit-card debt and may even make the problem worse by removing constraints if the borrower was closed to being maxed out. Many industry experts estimate that nearly 80 percent of borrowers who take out a consolidation loan end up running up unsecured debt within two years.

Both balance transfers and consolidation loans leave the borrower with the impression that this will help reduce debt. But, in actuality it makes their finances more complicated, doesn't give them a plan, or solve credit card usage problems that created the problem. The borrowers confuse motion for progress.

To truly get out of debt in as few as two to three years, follow these basic principles and stick to a do-it-yourself debt-reduction program.

For more helpful tips on reducing debt, visit's Finance channel.

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