Debt Consolidation: Is It a Good Idea?
Debt consolidation combines several debts into one payment, ideally at a lower interest rate. Here's how the main options work, when consolidation helps and when it doesn't, and how to avoid ending up deeper in debt.
By Pond.com editors Updated 2 min read
Quick answer
- Debt consolidation combines several debts into one new loan or account, ideally with a lower interest rate.
- Main options are a personal loan, a balance transfer card or a nonprofit debt management plan.
- It helps when it lowers your interest and you stop adding new debt.
- It doesn't help if the new rate or fees are higher, or if you run your cards back up.
- Debt settlement is different and can seriously damage your credit.
Juggling several credit card and loan payments with different due dates and interest rates is stressful. Debt consolidation rolls them into one payment, and if it's done right, it can save money and help you get out of debt faster. Done wrong, it just moves the problem.
This article is general information, not financial advice.
How consolidation works
You take out a new loan or account and use it to pay off your existing debts. You're left with one payment, ideally at a lower interest rate and with a clear payoff date.
The main options
| Option | How it works | Best for |
|---|---|---|
| Debt consolidation loan | Personal loan with a fixed rate and term pays off your debts | Good to fair credit; larger balances |
| Balance transfer card | Move card debt to a 0% intro APR card, usually with a fee | Good credit; balances you can clear in the intro period |
| Debt management plan | Nonprofit agency negotiates lower rates; you make one payment | Struggling to qualify for a loan or card |
| Home equity loan or HELOC | Borrow against your home | Homeowners; risky because your home is collateral |
See balance transfer cards and how to compare personal loan offers.
When consolidation helps
- The new APR is lower than the average of your current debts, after fees.
- You can afford the new payment and stick to it.
- You've stopped adding new debt and have a budget. See how to make a budget.
When it doesn't
- The rate or fees make it more expensive overall.
- The longer term lowers your payment but costs more interest.
- You run up your cards again, leaving you with the loan and new card debt.
- You put your home at risk to pay off unsecured debt.
Watch out for debt settlement
Debt settlement companies often advertise "debt relief." They typically tell you to stop paying creditors while you save money for lump-sum offers. This can lead to late fees, collections, lawsuits and serious credit damage, and forgiven debt may be taxable. Legitimate settlement companies can't charge fees until they've settled a debt.
A simpler alternative
If consolidation doesn't fit, pick a payoff method and stick to it. See debt snowball vs avalanche.
Common questions
A new loan or card causes a hard inquiry and may dip your score briefly. Over time, paying on time and lowering your credit card balances usually helps your score. Closing old accounts can hurt by raising utilization and shortening your history.
It's a program run by a nonprofit credit counseling agency. The agency negotiates lower interest rates with your card issuers, and you make one monthly payment to the agency, which pays your creditors. Plans usually last three to five years and may require closing the cards involved.
No. Consolidation repays your debts in full with a new loan or plan. Settlement tries to get creditors to accept less than you owe, usually after you stop paying, which can cause serious credit damage, fees and possible taxes on forgiven debt.