Why Could Getting A Loan To Pay Off Your Debt Be Committing Financial Suicide?

Let’s say by pledging your house as collateral, the banks gives you a loan and you pay off all your high interest credit cards and loans. So far so good -- now you only have the loan to pay off. BUT -- your credit cards now have no balance and inevitably, you buy a few things here and there, and before you know it -- your credit cards are back at the limit. Now you have the 'consolidation loan' and the credit cards. Everybody says, "No that won't happen to me" or "I'll never do that" but people do this every day and end up worse off that when they started.

In a study of the efficacy of debt consolidation loans, the FDIC concluded that "…some consumers will increase credit card and other consumer debt after a debt consolidation package is completed, thereby weakening their ability to repay outstanding debts and increasing the likelihood of bankruptcy."