At a Glance

Consolidation is one of many ways consumers can pay off debt but is debt consolidation a good idea for you? The answer depends on your financial situation and which method you choose.

Things to consider

How debt consolidation works

With consolidation, you’re combining multiple unsecured debts into one monthly payment. Balance transfer credit cards, personal loans, home equity loans, and debt management plans (DMP) are among the most common ways to consolidate debt.

What are the benefits?

The ultimate goal of consolidation is paying off debt, but other benefits may include:

  • Simplifying bill pay
  • Reducing your interest rate
  • Locking in a low rate
  • Creating a repayment timeline
  • Improving your credit score

Is debt consolidation the same as debt settlement?

Debt settlement is different from debt consolidation. Debt settlement companies go by many names (debt relief company, debt consolidation company, debt negotiation company, etc.). These for-profit companies negotiate a lump-sum repayment for less than you owe.

Debt settlement companies charge a fee, often equal to 15-20% of your debt. This process harms your credit score and report. If you choose this route, use caution. Make sure you understand the terms and ensure you’re using a reputable company.

(Note that debt settlement companies aren’t the same as nonprofit credit counseling agencies. Learn more below.)

When is consolidation a good idea?

“Is debt consolidation a good idea?” is a loaded question. As we mentioned above, there are multiple ways to consolidate, and every consolidation method has its pros and cons. Whether you choose a loan or a balance transfer credit card, success depends on a few factors:

  • A steady income. Many lenders like to see proof of stable income to qualify for a loan. And having steady paychecks will help you cover payments.
  • A high credit score. A good credit score can help you qualify for a 0% credit card or low-interest loan as well as better loan terms. If you decide debt consolidation is right for you, steadily repaying your debt consolidation loan can help to boost your credit score by decreasing your credit utilization and improving your payment history.
  • Discipline. Debt consolidation doesn’t solve the issue of debt. You will still need to dedicate yourself to making payments and not adding to your debt. Ensure you can be disciplined about quickly paying off a : debt consolidation loan to reach debt-free status before taking one on.

You also need to look at your debt. Consolidation is a good solution if:

  • Your total debt is less than 40% of your gross income. Calculate this number by dividing your total monthly debt payments (excluding your mortgage) by your monthly income before taxes (your annual salary divided by 12).
  • You have high-interest rate debts. You may be able to consolidate and reduce your interest rate, especially if you have good credit. Even decreasing your interest rate by a few percentage points can result in big savings over time.
  • You dislike managing multiple credit cards. Consolidation can help simplify your bills and streamline your debt payments into one easy, predictable monthly payment. This may also save you from late or missed payments.
  • You want better repayment terms. Consolidation can offer shorter (or longer) repayment plans as well as lower fees so you can choose the repayment terms that best fit with what you can afford

Find the Best Debt Consolidation Loan for You

Answer these simple questions to find solutions you're likely to get approved for

What debt do you want to consolidate?

Select all that apply

Others does not include mortgage

When is consolidation a bad idea?

Depending on your financial situation, debt consolidation may be less effective than other solutions. A personal loan or balance transfer credit card may be a bad idea if:

  • You have a small amount of debt that you could repay in 6-12 months.
  • You’re unable to dedicate yourself to getting out of debt after consolidating.
  • You have poor credit-this will lead to a high-interest loan.
  • Your total debt is more than half your income.

Remember that consolidation doesn’t forgive or reduce your debt. If you don’t increase your payments and change your spending habits, you could find yourself with more money trouble.

Take time to compare different ways to pay off credit debt. Review the pros and cons and understand the terms to make sure you don’t end up with a higher interest rate or paying more in fees or interest over time.

Different types of debt consolidation

Consolidation might be an effective option for some, but is debt consolidation a good idea for you? By evaluating all your consolidation options, you’ll be able to determine which––if any––are right for you.

1. A balance transfer credit card

With this consolidation method, you’ll move your debt from multiple cards to a single balance transfer card. You’ll need good to excellent credit to ensure the interest you save is more than the upfront fee.


  • 0% APR introductory period, often 12-18 months


  • May charge an initial fee of 3-5% of the amount transferred
  • Some cards charge an annual fee
  • The lender may check your credit with a hard inquiry, which may hurt your credit score

2. A personal loan

A personal loan is also called a debt consolidation loan or a credit card consolidation loan. You’ll use this loan to pay off your debts and then have one monthly payment. Eligibility requirements differ by lender, but better credit will help you get a lower APR. Secured vs. Unsecured Personal Loans.


  • Pre-qualify without affecting your credit score
  • Fixed but negotiable interest rates
  • Repayment term of 3-5 years


  • Some loans carry a one-time fee of 1-8% of the loan amount
  • Potentially higher APR than your current credit cards

3. A home equity loan

You might be able to consolidate your debt through a home equity loan or a home equity line of credit (HELOC). Using your home’s equity can be a risky option, though. If you default, the lender can foreclose. Home Equity Loans vs. Home Equity Lines of Credit.


  • Lower interest rates than personal loans
  • Longer repayment periods
  • You may qualify without good credit


  • Lack of payment may lead to foreclosure

4. A debt management plan (DMP)

If you’re in over your head, reach out to a non-profit credit counseling agency to help you enroll in a Debt Management Plan. While not free, your money will be going toward paying off your debt.


  • Consolidate payments
  • Extend debt-payoff timeline
  • Help cut interest rates (generally by half)
  • Education programs


  • May take 3-5 years to eliminate debt


How Much Can You Save With Debt Consolidation?

When you’re considering if debt consolidation is a good idea, it makes sense to calculate how much you can save. After all, lower interest rates and increased savings are some of the major benefits of consolidating debt. The below table outlines how much you could save by consolidating four high-interest credit cards into one debt consolidation loan.

How much you can save with debt consolidation

Is Consolidating Credit Card Debt a Good Idea?

Consolidating credit card debt is a good idea when your credit score is high enough to get you a favorable loan or balance transfer offer. If the interest rate of your loan or balance transfer card is significantly lower than what you’re paying now, then consolidating credit cards into a single monthly payment can save you significant money in interest.

Does Debt Consolidation Hurt Your Credit Score?

If you apply for a new debt consolidation loan or balance transfer credit card, you may temporarily see a dip in your credit score. That’s because lenders perform a hard inquiry on your credit, which is reported to the credit bureaus. Overall, if you successfully make payments on time and lower your credit utilization, debt consolidation will likely have a positive impact on your credit score.