Debt Consolidation

If you’re struggling to pay off multiple debts, you may be able to consolidate it. Debt consolidation combines your debts into a single loan or credit card, often with a low introductory APR. Some consumers find that debt consolidation makes getting out of debt easier.

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    Jennifer Schell

    Jennifer Schell

    Financial Writer

    Jennifer Schell is a professional writer focused on demystifying annuities and other financial topics including banking, financial advising and insurance. She is proud to be a member of the National Association for Fixed Annuities (NAFA) as well as the National Association of Insurance and Financial Advisors (NAIFA).

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    Lamia Chowdhury

    Lamia Chowdhury

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    Lamia Chowdhury is a financial editor at Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.

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  • Updated: May 1, 2023
  • 9 min read time
  • This page features 11 Cited Research Articles
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What Is Debt Consolidation?

Debt consolidation is one way to manage high amounts of debt. When you consolidate your debt, you’re moving multiple high-interest debts into one combined loan. Doing so replaces your several monthly debt payments with just one payment.

Debt consolidation is typically applied to unsecured loans, such as credit cards, student loans or personal loans. Many consumers find that consolidating their debt makes it easier to manage, since you only have to make one monthly payment to go towards all outstanding debts.

The way debt consolidation works will depend on the type of consolidation product you use. But in general, you’ll take out a new loan or apply for a new credit card. Once approved, the balances of all your current debts will be rolled into the consolidation loan, and you’ll make payments on that loan instead of multiple other debts.

Debt Consolidation vs. Debt Settlement

Debt consolidation is different from debt settlement, which is another strategy used to get out of debt. Debt settlement attempts to reduce the total amount of debt you owe by negotiating with your creditors. You’ll end up paying a lump sum settlement that’s less than what you owe. 

In contrast, debt consolidation simply reduces the number of bills you must pay each month by moving them under one loan. Note that you’ll still have to pay the full balances of these loans. Debt settlement is a more drastic measure than debt consolidation and is recommended for people whose debt threatens to bankrupt them.

Did You Know?

In a recent survey, 13% of participants responded that managing debt is the most important money skill not taught in schools.

Options for Consolidating Your Debt

Consumers who want to consolidate their debts have a few options on how to do so. Debt consolidation products include balance transfer credit cards, unsecured personal loans and home equity loans.

Balance transfer credit cards are a type of credit card designed to help consolidate debt. A balance transfer card will typically have a low or 0% introductory APR. This means that for the first several months, the debt transferred to the card will accrue little to no interest. Once the introductory period ends, however, the interest rates on balance transfer cards are similar to those of traditional credit cards.

Another option for consolidating debt is an unsecured personal loan. These are loans that don’t require any collateral. Consolidating your debt with a personal loan has its advantages. For example, these loans might have a lower interest rate and smaller monthly payments. 

However, there are drawbacks to this type of loan as well. A lower monthly payment means it may take even longer to get out of debt. Some consolidation loans also charge extra fees or costs. It’s important to read the fine print and understand the terms of the loan completely before signing up for it.

Homeowners can consolidate debt with a home equity loan. This can take the form of a loan or a home equity line of credit, commonly known as a HELOC. Home equity loans are secured debts, which means your home is used as collateral to protect the creditor. If you don’t pay the loan back, you could lose your home.

Because they’re secured, home equity loans often have more favorable terms than other types of loans, such as lower interest rates. However, this type of loan generally involves paying additional fees or closing costs, which can amount to hundreds or even thousands of dollars.

Pros and Cons of Debt Consolidation

Debt consolidation can help you get out of debt faster, and you may end up paying less than you would have if you didn’t consolidate. However, there are risks and drawbacks to consolidating your debt. Before planning how to manage your debt, it’s important to weigh the pros and cons.

Debt Consolidation Pros & Cons


  • One monthly payment instead of many
  • Can have lower interest rate
  • Can have lower monthly payment


  • May take longer to get out of debt
  • May charge additional fees
  • Must meet loan qualifications

Source: Pentagon Federal Credit Union

Debt Consolidation Example

Here is an example to help you understand how debt consolidation works. Let’s say you have two credit cards and a student loan that all need to be paid off. Each type of debt has a different interest rate and monthly payment.

  • Credit Card 1: $5,000 balance, 25% APR
  • Credit Card 2: $10,000 balance, 20% APR
  • Student Loan: $15,000 balance, 5% APR

If you consolidate these debts, you’ll take on a $30,000 loan with one fixed interest rate. For this example, let’s say the loan is a six-year loan with a 10% APR. When you pay off this loan over six years, you’ll end up paying $10,015.81 in interest.

For comparison, if you chose not to consolidate your loans and instead made minimum 5% payments on each loan every month, it would take nearly 11 years and $16,922 in interest to fully pay off the debt.

Impact on Credit

Debt consolidation might decrease your credit score slightly at first, but over time, it can actually boost your credit if you’re responsible about repaying the consolidated loan.

Consolidating your debt requires taking out a loan or getting a new credit card. Both of these actions trigger hard credit inquiries, which means a lender is pulling your credit report to judge whether you qualify for a line of credit. Having too many hard inquiries on your credit in a short period of time can lower your credit score by up to five points.

In the long run, however, debt consolidation loans can benefit your credit. The most important factor in calculating your credit score is making payments on time, so if you make payments consistently towards your consolidation loan, you could raise your score over time.

Below are some answers to common questions about the impact of debt consolidation on your credit.

How Debt Consolidation Impacts Credit
What is the minimum credit score for a debt consolidation loan?
Most loan companies require borrowers to have a FICO credit score that’s ranked “Fair” or better. This means that the minimum credit score for many debt consolidation loans is 580. 
How long does debt consolidation stay on your credit report?
Debt consolidation loans are reflected on your credit report just like any other loan. So, if you pay your loan on time, this positive data will remain on your report for up to 10 years. A missed or late payment will stay on your report for up to seven years.
Can I still use my credit card after debt consolidation?
Generally, you do not have to close your credit cards after you consolidate your debt.

Is Debt Consolidation Right for Me?

If you have debts from multiple sources and are having trouble keeping up with the payments, debt consolidation may be right for you. Consolidating your debt can also reduce the interest you’ll pay in the long term, but you should run the numbers on any consolidation loan to make sure.

Consolidation won’t magically solve your debt problems, but it can help you get out of debt faster. If you’re going to consolidate your debt, you should have a plan in place for how you will pay off the consolidation loan and how you will avoid going into debt in the future.

Debt consolidation is a good option for those with great or excellent credit. The better your credit score is, the more likely you are to qualify for low or no-interest introductory rates on a consolidation loan or balance transfer credit card.

You should do your best not to borrow any more money while you’re paying off the consolidated debts. Debt consolidation works best when you’ve already made lifestyle changes to avoid falling back into debt.

Alternatives to Debt Consolidation

Debt consolidation isn’t right for everyone. If your debt has gotten so overwhelming that you are at risk of going bankrupt, consolidation might not be enough. At that point, your best option may be to seek help from a debt settlement company.

Alternatively, if you have debts that are relatively low interest or have low balances, it may not be worth it to consolidate into a loan. In that case, you can employ a popular debt repayment strategy, such as the snowball method or the avalanche method.

With the snowball method, you prioritize paying down the debts with the lowest balances first. Once those debts are completely paid off, you can take the money that was going to pay those debts and work towards paying off larger debts.

The avalanche method of debt repayment prioritizes paying the debt with the highest interest rate, since this debt will cost you the most money year over year. Like the snowball method, once the high interest debt is fully paid off, you take the money going towards that debt and put it towards the debt with the next highest interest rate, and so on.

How To Get Started With Debt Consolidation

Once you’ve decided to consolidate your debt, the first step is to figure out how much you owe. Look at every outstanding debt you want to pay off and note the balance, interest rate and monthly payment of each one. This will help you find the best consolidation option for your personal financial situation.

The next step is to shop around for debt consolidation offers. Pay attention to factors like introductory rates, how long those rates last and what the fixed rate will be after the introductory period. You should also find out the credit requirements for each offer and whether you’ll meet the qualifications.

Who Offers Debt Consolidation Loans?

You can find debt consolidation products at a variety of financial institutions, including banks, credit unions, mortgage lenders, credit card companies and personal loan companies.

Companies Offering Debt Consolidation Loans

Credit Unions
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Credit Card Companies
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Wells Fargo
U.S. Bank
Happy Money
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 1, 2023

11 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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  7. PenFed Credit Union. (2021, March 4). Debt Consolidation vs. Debt Settlement: What's the Difference?
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