Let's look at a typical debt consolidation scenario for someone with a car payment, a couple of credit cards, and a home equity loan. We can separate these accounts into secured and unsecured debt: the car loan and the home equity loan are secured debt. That means they have a physical asset that backs them up, and if you fail to make the loan payments the lender will take the asset back to pay for the loan.

Secured debt is generally at a lower interest rate than unsecured debt because the risk is lower for the lender. But, the risk is higher for the borrower since the penalty for not paying back the loan is losing the asset. And if that asset is something vital to you or your family like your house, your car, or something else, you can be in big trouble if the bank takes it back.

So once we add everything up and determine the amount of money that we have to pay out each month to maintain our accounts in good standing, we can compare that to our income and find out what the difference is. And, if we took all your recurring bills into account like utilities, gas, groceries, insurance, and so on, we should be able to tell at this point how much we can dedicate to our smallest debt on top of the minimum payment.

This is referred to as phased payments, where you dedicate all your spare resources to paying down your smallest debt. Once that debt is payed off, you take all your spare resources PLUS the minimum payment you were dedicating towards that debt and apply it to the next smallest account.

You can see where this method gets some big gains initially on your smallest accounts, and gains momentum as it goes along. As you pay off some of your smaller accounts you gain access to more free cash that you use to tackle the larger accounts. It's a powerful psychological and mathematical tool that continues to achieve success at a regular rate and reinforces the good feeling you get when you pay off debt.

The key to this whole process, of course, is making sure that when you go through it you have already committed to living within your means and not using credit cards anymore. You are, in effect, borrowing money every month that you use credit cards and don't pay off the balance. Not to mention the interest that you're paying. Your income is being diluted by paying someone else to buy things for you. It's a dangerous cycle.