If you're like millions of Americans, you are doing your best to manage unwieldy consumer debt. You may have several credit cards, a charge card or two, and perhaps even medical bills or collection accounts to pay. It's easy to become frazzled by the varying due dates and having to review so much paperwork.

Enter debt consolidation. By combining multiple accounts into one, it is possible to streamline your system and efficiently repay what you owe. But is it right for you? As with every financial decision, the answer depends on your needs and situation. Debt consolidation is a broad term, and there are several ways to combine balances. Each option has its benefits and drawbacks.

Secured Consolidation Loans
If you are a homeowner and have built up home equity, you may be able to use some of it to "pay off" your unsecured debts. Of course you are not really repaying the balance but shifting it. While second mortgages come in two basic forms - home equity loans and lines of credit - in this case a loan typically makes the most sense because you borrow only the amount you need, payments are consistent, and there is a definite pay-off date.

• Benefits - There are upsides to consolidating unsecured debts into a home equity loan. The interest can be a fraction of what it is for unsecured debt, and you can often deduct at least some of that interest from your income taxes.

• Drawbacks - Home equity loans are not free - in fact, closing costs can be thousands of dollars. Also, once you transfer the debt, your credit cards will be empty - and available for use. If you spend more than you make, there is a good chance you'll use them and rebuild the balances. This will leave you in a difficult position: not enough money to repay your obligations, and an increase in your stress level. If you can't make your home loan payments, your property is at serious risk of foreclosure.
  

Unsecured consolidation loans
Many financial institutions, including banks and credit unions, offer unsecured debt consolidation loans. These are new loans designed to assume your old debt. Interest rates on these products depend on such factors as your credit history and income.

• Benefits - If your main reason for wanting to consolidate is to reduce the number of accounts you have to deal with, an unsecured consolidation loan can work well for you. Also, by not converting unsecured debt into secured debt, you can keep your assets relatively safe. If you fail to make payments, the creditor must sue you in a court of law and win before recouping the loan.

• Drawbacks - If you have too much debt or a spotty payment history, the interest rates on consolidation loans can be even higher than what you are currently paying! After all, the lender is taking a chance on you, since you've already proven yourself to be a somewhat risky customer. And, as with the home equity loan, after consolidation your credit cards will again have no balances...they can be pretty tempting to turn to if times get rough.
  

Debt Repayment Plans
A debt repayment plan is not a loan, but a three-to-five year payment arrangement made by a credit counseling organization. If, after a thorough financial review, you and your counselor find that such a plan makes sense, you would close your accounts and make one monthly payment to the agency, which in turn pays the creditors. Payments remain consistent, and as each debt is deleted, the remaining creditors are paid more.

• Benefits - These plans offer the benefits of a single monthly payment, which simplifies money management, and many creditors reduce or even eliminate interest rates and penalty fees. Also, a reputable credit counseling agency offers support and education. A good counselor will help you with budgeting and goal setting - for free.

• Drawbacks - During the time that you're on the plan, you agree to not get into any more debt. Adopting a cash-only lifestyle can take some getting used to! Some creditors report participation on the plan to the credit bureaus. Though this notation is not factored into your credit score, lenders and other businesses may perceive it negatively.
  

The Bottom Line
Consolidating your debt should only be done after weighing all the positives and negatives. It can save you a lot of money and time in the right circumstances, but don't make hasty decisions! Be sure you can make the new payments and not get into future debt. Take the time to research the lender or credit counseling agency too, and read all contracts and agreements carefully before signing.

It is very important to approach your finances with the future in mind. Consolidation of any kind is not meant to be a short-term solution. Develop a budget to know you can afford the old and new payments, and close credit accounts if you think you will use them. Finally, make savings as much of a priority as debt repayment. After all, the more cash you have socked away, the less chance you will "need" to borrow money to get by.

1. Never waste money on ATM fees. Go to a drugstore or supermarket and buy something you need (toothpaste? envelopes?) to get cash back at no charge.

2. Have a small meal before dining out so you don't order too much and over-spend.

3. Use a store's "hold" policy for expensive purchases to give you time to think before committing.

4. Drink tap water. In many communities it's as healthy (and tasty) as bottled water.

5. Remember the "touch it once" rule. Rather than tossing bills in a pile, pay them the day they arrive to avoid late payment fees.

6. Don't buy something simply because its on sale. A 40 percent discount is a 60 percent liability if you never use it or already have one.

7. Become a member of the library. It's not just for books, but CDs, DVDs, classes, story hours for children, Internet service...all for free.

8. Make saving money a family affair. Set a group goal (such as a vacation or new stereo system) and have everyone do his or her part to contribute.

9. Ask for samples from your doctor, dentist, or at the cosmetics counter.

10. Check your account balances every day. While that may sound extreme, it will keep you from spending what you don't have.

The Total Money Makeover: A Proven Plan for Financial Fitness
By Dave Ramsey (Nelson Books)

If you really want the hard truth about debt - how you may have gotten into it and how you can get out of it - read The Total Money Makeover: A Proven Plan for Financial Fitness. Author Dave Ramsey nicely but firmly tells it like it is. He contends that most of the time consumers get in over their heads because of short-term thinking - living for today rather than planning (and saving) for tomorrow. Most readers will find his honesty and insight on these matters refreshing.

Though Ramsey places the bulk of the responsibility firmly on the borrower, he isn't interested in punishing his debt-burdened readers. He wants to help you out of debt quickly and forever, and this manual tells how in seven basic steps. His main premise is that by adjusting your attitude about charging first, everything else falls into place. Of course, changing entrenched habits can be a quite a challenge, but Ramsey offers plenty of inspiration to make the dream of debt-free living come true.

The Total Money Makeover includes many helpful charts and worksheets, but the primary reason that this book is effective is Ramsey's motivational words. He exposes his own experiences with money and credit cards so readers can learn not just from his successes but also his mistakes.