Debt consolidation combines multiple debts into one new loan or account, ideally with a lower interest rate and a single monthly payment.
Common Methods
- Personal consolidation loan: A fixed-rate loan used to pay off cards and other debts.
- Balance transfer card: A card with a low or zero introductory rate, usually with a transfer fee.
- Home equity loan or line: Often lower rates, but your home becomes collateral.
- Debt management plan: Offered through nonprofit credit counseling agencies.
Benefits
You may reduce interest costs, simplify your finances and set a clear payoff date. Paying off cards can also lower your utilization and help your score.
Risks
- Fees, such as origination or transfer fees
- A longer term could increase total interest
- Running up the old cards again
- Putting assets at risk with secured loans
When It Makes Sense
Consolidation works best when you qualify for a meaningfully lower rate, have a stable income and are committed to not taking on new debt. Compare the total cost, not just the monthly payment, before you decide.