At a Glance

Consolidation is one of many ways consumers can pay off debt but is it a good fit for you? The answer depends on your financial situation 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?

Any 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. You’ll need proof of stable income to qualify for a loan and cover payments.
  • A high credit score. A good score can help youqualify for a 0% credit card or low-interest loan as well as better terms.
  • Discipline. Debt consolidation doesn’t solve the issue of debt. You should dedicate yourself to making payments and not adding to your debt.

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. This excludes your mortgage.
  • You have high-interest rate debts. You may be able to consolidate and reduce your interest rate, especially if you have good credit.
  • You dislike managing multiple credit cards. Consolidation can help simplify your bills, saving you from late or missed payments.
  • You want better repayment terms. Consolidation can offer shorter (or longer) repayment plans as well as lower fees.

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 card 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

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

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. Learn more.


  • 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

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. Learn more.


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


  • Lack of payment may lead to foreclosure

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 DMP. 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