Most people think debt consolidation is when you combine a bunch of smaller bills into one monthly payment because you want to lower the monthly payments or reduce the interest rate. The debt is usually consolidated into a secured loan. Because it's a secured loan, such as a home equity loan, the interest rate will be much lower and the monthly payment will also be lower.

There are other ways to consolidate debt by working with credit card companies to reduce interest and payments without taking out a secured loan. The method of debt consolidation varies with each financial situation. The question is, who needs debt consolidation?

Now that you know what debt consolidation means, how can you tell if you should consider consolidating your bills? Here are some questions to consider when making the decision to consolidate.

Are you currently making timely payments on all of your debts? If you can easily make the minimums on the credit cards and monthly payments on all of your debt, then debt consolidation may not be for you. Then again, if it's possible to lower your interest rates, wouldn't it be nice to stash some cash back in your wallet? Debt consolidation isn't just for individuals and families who are behind or barely scraping by with the bills. It can also be a valuable way to get out of debt quickly and easily.

If you do manage to pay all the bills each month, is there any money left for recreation or entertainment? Don't misunderstand, I'm not advising you to blow all your extra money of frivilous stuff, but budgeting a little cash for fun things is okay. As a matter of fact, it's healthy to budget a little something for entertainment. Depriving yourself of recreation in order to pay the bills may lead you towards rash spending or impulsive buying habits.

Are interest rates dropping? Another reason to consider debt consolidation is the interest rates. If interest rates are dropping, it may be advisable for you to consolidate debt. Regardless of your budget and ability to pay more than the minimum payments, if it's possible to secure a great interest rate, then by all means, go for it.

So, how do you know if you can benefit from consolidating debt? To gain some insight into your circumstances, take an honest look at your financial situation, the interest rates on your debts and the bills you're paying each month. If all of the money you make goes to pay bills, it's time to examine your expenses and income. Keep in mind your financial situation will change over time. So, if now isn't the right time for you to consolidate your debt, it may be just the option you'll need at some point in the future.