What Is Debt Consolidation? How It Works, Options and Risks
How debt consolidation works, the main options — loans, balance transfers, debt management plans and home equity — and how to tell if it saves money.
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Debt Consolidation
Combine debts into one payment — and make sure it actually saves money.
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What debt consolidation does
Debt consolidation combines several debts — usually credit cards — into a single new debt, ideally with a lower interest rate, one monthly payment and a clear payoff date. It does not reduce what you owe; it changes the terms on which you repay it.
The main options
| Option | How it works | Watch out for |
|---|---|---|
| Personal loan | Fixed-rate installment loan pays off your cards | Origination fees; rate depends on credit |
| Balance transfer card | Move balances to a 0% intro APR card | Transfer fee; high APR after promo ends |
| Debt management plan | Nonprofit counselor negotiates lower rates; you make one payment | Cards usually closed; 3–5 year commitment |
| Home equity loan or HELOC | Borrow against your home at a lower rate | Your home is collateral |
| 401(k) loan | Borrow from your retirement account | Lost growth; repayment rules if you leave your job |
When consolidation makes sense
- The new APR, including fees, is clearly lower than your current rates.
- The total cost is lower — not just the monthly payment.
- You have stopped adding new debt.
Compare your current debts with a consolidation loan side by side in the debt consolidation calculator, and read what is debt consolidation? for a complete walk-through.
Frequently asked questions
What is the best way to consolidate debt?
It depends on your credit and the amount. A 0% balance transfer card can be cheapest for smaller card balances you can repay within the promo period. A personal loan offers a fixed rate and payoff date for larger amounts. A nonprofit debt management plan can help if you do not qualify for a lower rate.
Does debt consolidation hurt your credit?
Applying can cause a small, temporary dip from a hard inquiry. Over time, lower credit card utilization and on-time payments on the new loan can help your score.
Should I use home equity to consolidate credit card debt?
It can lower your rate, but it turns unsecured debt into debt secured by your home — if you cannot repay, you could face foreclosure. Consider this option carefully.
Part of our Loans hub and our complete personal finance guide. Read our editorial standards.
Debt Consolidation guides
All guides →Debt Payoff Strategies: Avalanche vs. Snowball (and When to Use Each)
Compare the debt avalanche and debt snowball methods with a worked example, plus other debt payoff strategies and debt management tips to get debt-free faster.
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What Is a Balance Transfer? How 0% Balance Transfer Cards Work
What a balance transfer is, how 0% intro APR balance transfer cards work, how to calculate the fee and savings, and the mistakes that can erase the benefit.
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Personal Loan vs. Credit Card: Which Is Better for Your Situation?
Personal loan vs. credit card: compare interest rates, fees, repayment structure and credit impact, with examples showing when each option costs less.
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