How it works, in one picture
Say you have three balances, each with its own rate and due date. Consolidating swaps them for one.
The total you owe does not change on the day you consolidate. What changes is the rate you pay on it, how many payments you track, and, with a fixed-term loan, the date it is all paid off.
Four ways to consolidate
"Debt consolidation" describes the goal. There is more than one tool for it.
Personal loan
A lump sum at a fixed rate, repaid in equal monthly payments over a set term.
- Good for
- A clear end date and a payment that never changes
- Watch for
- An origination fee, and a rate that isn't lower than your cards
Balance transfer card
You move card balances to a new card with a low introductory rate.
- Good for
- Debt you can clear before the introductory rate ends
- Watch for
- A transfer fee, and a higher rate once the introductory period is over
Home equity loan or line
You borrow against the value of your home and use the money to pay off other debts.
- Good for
- Larger balances, usually at a lower rate
- Watch for
- Your home is the collateral. Missed payments put it at risk
Debt management plan
A nonprofit credit counseling agency arranges terms with your creditors. You make one payment to the agency. It is not a loan.
- Good for
- When you can't qualify for a lower-rate loan
- Watch for
- You may have to close the cards in the plan
What it does, and what it doesn't
It can
- Replace several due dates with one.
- Lower the interest you pay, if the new rate is lower.
- Give the debt a fixed end date.
It can't
- Reduce the amount you owe.
- Stop new balances building up on the cards you cleared.
- Help if the new rate is higher than the old ones.
That last point decides most cases. Before you consolidate, compare the rate you are offered with the rates you pay now. Our debt payoff calculator shows what your current debts cost if you simply keep paying them.
When it makes sense
- You are offered a rate below the average of what you pay now.
- Your income is steady enough to make the same payment every month.
- You have a plan to keep the paid-off cards from filling up again.
If the balances are small enough to clear in two or three months, paying them down directly is usually simpler. And if you are wondering what it does to your credit score, read does debt consolidation hurt your credit?