By Ben LuthiWhat Is Debt Consolidation and How Does It Work?
By Ben Luthi
Quick Answer
- Debt consolidation is when you pay off one or more existing debts using a new loan or credit card, ideally with a lower rate.
- Consolidating your debts may help you simplify repayment, save money and get out of debt faster.
Debt consolidation is the process of paying off one or more debts with a new debt consolidation loan or credit card. If you're combining multiple debts into one, the process can simplify your debt repayment plan.
Additionally, you may be able to take advantage of a lower interest rate, a more favorable repayment plan and a shorter payoff timeline. Here's what you need to know about debt consolidation.
How Does Debt Consolidation Work?
Consolidating debt typically involves combining multiple balances into one, usually with a new loan or credit card that offers a lower interest rate and other favorable terms. However, it's also possible to consolidate a single balance.
When taking out a consolidation loan, you'll typically borrow enough to cover the balances you want to consolidate. Then, once you receive the loan proceeds, you'll use them to pay off your other debts. In some cases, lenders may even be willing to pay off your balances directly.
With a credit card, you'll usually request a balance transfer with your new card issuer, who will pay off your included balances directly.
How to Consolidate Debt
There are four main ways you can consolidate debt. Here are your options, plus an overview of how each compares.
| Personal Loan | Balance Transfer Credit Card | Home Equity Loan | Home Equity Line of Credit | |
|---|---|---|---|---|
| Interest rates | 6%-36% | Introductory 0% APR for 12 to 21 months, then 15%-29% | 7%-14% | 7%-18% |
| Upfront costs | Origination fee ranging from 0%-10% | Balance transfer fee ranging from 3%-5% | Closing costs ranging from 2%-5% | Closing costs ranging from 2%-5% |
| Repayment terms | 1-7 years | No set repayment term | Up to 30 years | Draw period of up to 10 years; repayment period of up to 20 years |
| Collateral required | No | No | Yes | Yes |
| Credit score requirement | Generally good credit or better | Generally good credit or better | 680 or higher is preferred | 680 or higher is preferred |
Balance Transfer Credit Card
A balance transfer credit card is a type of credit card that offers an introductory 0% annual percentage rate (APR) promotion, which could last up to 21 months. During this time, you can pay down debt transferred from another credit card—some even allow you to consolidate certain types of loans—without paying any interest. Some of the best balance transfer credit cards also offer welcome bonuses, rewards and other perks.
That said, balance transfer credit cards typically charge an upfront fee of 3% to 5% of the transfer amount. You may also have a deadline by which you need to request the transfer after opening the account to qualify for the 0% intro APR promotion. Finally, you won't find out what your new card's credit limit is until you're approved. Depending on how much debt you have, it may not be sufficient to cover your full balance.
Learn more: Balance Transfer Credit Card Mistakes to Avoid
Debt Consolidation Loan
A debt consolidation loan is a personal loan you can use to pay off credit cards, medical bills and other types of debt. Personal loans don't offer a 0% APR promotion, but if you have good or excellent credit, you may be able to get approved for a lower interest rate than what you're currently paying—especially if you're trying to consolidate credit card debt.
Additionally, personal loans offer a fixed repayment schedule, which can range from one to seven years in most cases. This feature can be particularly beneficial for people with credit card debt who struggle to stick to a payment plan.
Some personal loan companies charge an upfront origination fee, which can range from 1% to 12% of the loan amount. However, you may be able to avoid an origination fee if you have good or excellent credit.
Learn more: How to Get a Debt Consolidation Loan
Compare personal loan rates
Find APRs from 5.96% to 35.99% and flexible terms of 24 to 120 months. Loan amounts range from $1,000 up to $250,000, with funding available the same day or up to 3 days.
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Est. APR6.99 - 35.49%
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Est. monthly payment$224 - $3,237
Term24 - 84 mo
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Loan amount$2,000 - $50,000
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Term36 - 60 mo
Est. APR5.96 - 35.99%
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Term24 - 60 mo
Est. APR7.39 - 28.70%
Loan amount$20,000 - $250,000
Est. monthly payment$621 - $6,352
Term36 - 120 mo
Est. APR18.00 - 35.99%
Loan amount$1,500 - $20,000
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Term36 - 60 mo
Est. APR8.99 - 35.99%
Loan amount$2,000 - $50,000
Est. monthly payment$91 - $1,806
Term24 - 60 mo
Est. APR9.95 - 35.95%
Loan amount$2,000 - $35,000
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Term24 - 60 mo
Est. APR7.74 - 35.91%
Loan amount$1,000 - $50,000
Est. monthly payment$31 - $1,804
Term36 - 60 mo
Est. APR6.70 - 35.99%
Loan amount$1,000 - $50,000
Est. monthly payment$31 - $1,806
Term36 - 60 mo
Est. APR7.99 - 35.99%
Loan amount$5,000 - $40,000
Est. monthly payment$226 - $1,445
Term24 - 60 mo
Est. APR7.95 - 29.99%
Loan amount$5,000 - $50,000
Est. monthly payment$226 - $1,617
Term24 - 60 mo
Est. APR11.69 - 35.99%
Loan amount$1,000 - $50,000
Est. monthly payment$33 - $1,806
Term36 - 60 mo
Est. APR9.99 - 35.99%
Loan amount$1,000 - $35,000
Est. monthly payment$32 - $1,264
Term36 - 60 mo
Est. APR9.98 - 26.80%
Loan amount$5,000 - $50,000
Est. monthly payment$231 - $1,521
Term24 - 60 mo
Est. APR7.99 - 35.99%
Loan amount$2,000 - $30,000
Est. monthly payment$90 - $1,187
Term24 - 48 mo
Est. APR6.25 - 35.99%
Loan amount$15,000 - $50,000
Est. monthly payment$667 - $1,806
Term24 - 60 mo
View all of our Best Personal Loans for 2026 to see what you’re likely to qualify for, and the rates and terms you might get.
Home Equity Line of Credit (HELOC)
A HELOC functions similarly to a credit card in that you get access to a revolving line of credit. During the draw period, which can last up to 10 years, you also typically only need to pay interest on the amount you borrow.
If you make it to the repayment period, you'll typically have up to 20 years to pay down your remaining balance. However, if you move before that happens, you'll simply use proceeds from the sale to pay off the debt. Note, however, that if you fail to make payments on a HELOC, you could lose your home.
HELOC interest rates can be low, especially if you have great credit. They're also usually variable, which means that your rate can go down if market rates decrease. However, the opposite is also true. One thing to watch out for as you compare HELOCs is the fees, which can come in the form of closing costs, ranging from 2% to 5% of the loan amount, as well as annual fees and prepayment penalties.
Learn more: What You Need to Know About HELOCs
Home Equity Loan
A home equity loan offers a lump-sum disbursement of a portion of your home equity, which you'll repay over a term of up to 30 years.
Home equity loan rates can be low, especially if you have excellent credit. They're also fixed, which means you don't have to worry about your costs fluctuating over time. As with HELOCs, though, you may face foreclosure if you default on your payments.
As you shop around, you'll want to pay attention to closing costs, which can range from 2% to 5% of the loan amount, and any other potential fees lenders may charge.
Learn more: Home Equity Loans an Increasingly Popular Way to Tap Equity
What Credit Score Do You Need for Debt Consolidation?
You generally need good credit scores for debt consolidation to make financial sense. While you can technically qualify for a personal loan with fair or even bad credit, you may have a hard time qualifying for an interest rate that's low enough to help you save money.
As for balance transfer credit cards, most of them require good credit scores to get approved. According to FICO, that typically starts at 670, but credit card issuers may have their own minimum score requirements.
Does Debt Consolidation Hurt Your Credit?
Consolidating your debt can cause a slight temporary decrease in your credit scores. This is largely due to the hard inquiry the lender makes when you apply for credit and the new credit account, which reduces your average age of accounts.
If you get a balance transfer credit card, your credit could also dip if the transfer results in a high credit utilization rate on your new card. As you pay down the balance, however, your credit scores will likely improve.
If you use a consolidation loan to pay off credit card debt, your utilization rate won't be a factor since credit scoring models only consider utilization of revolving credit (such as credit cards). In fact, reducing your utilization rate on your credit cards to 0% can potentially help your credit scores.
Pros and Cons of Debt Consolidation
Pros
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Potential savings: Whether you pick a balance transfer credit card or a personal loan with a lower interest rate than the one you're currently paying, you could potentially save hundreds—even thousands—of dollars on interest charges. It could also result in a lower monthly payment, freeing up some cash flow in your budget.
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Repayment flexibility: With a balance transfer card, you could get a 0% intro APR promotion for anywhere between 12 and 21 months. But if you have a lot of debt and need more flexibility with your monthly payment, you could opt for a debt consolidation loan and get more options, making it easier to find a term that works for you.
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Easier to manage: If you have multiple monthly debt payments, consolidating your debts combines them into one payment, making it easier to manage your repayment plan.
Cons
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May not qualify: If you don't have good or excellent credit, you may have a hard time getting approved for a balance transfer card or a low-interest debt consolidation loan. Even if your score is in good shape, you may not get the terms you're looking for if you have a significant amount of debt.
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Possible upfront fees: You'll be hard-pressed to find a balance transfer credit card that doesn't charge a balance transfer fee on a 0% APR promotion. While you can get a personal loan with no origination fee, your options may be limited if your credit isn't near perfect. While these fees aren't necessarily a deal-breaker, don't forget to include them when calculating your potential savings.
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Could lead to more debt: While consolidating your debt can put you in a better position to pay down your debt, it doesn't change the circumstances that put you in debt in the first place. Unless you have a clear plan for avoiding more debt, freeing up available credit on a credit card with another card or a personal loan could put you in danger of racking up another balance.
Is Debt Consolidation a Good Idea?
Whether or not it's a good idea to consolidate debt depends on the specifics of your financial situation. You should weigh the pros and cons of debt consolidation and think carefully about how they apply to your goals.
Consider consolidating your debt in these scenarios:
- You have high-interest credit card debt. Debt consolidation works best for credit card debt because it offers a lot of potential savings.
- You have great credit. Having a FICO® ScoreΘ in the 700s or higher will give you the best chance of securing favorable debt consolidation terms.
- You have a payoff plan. If you're thinking about a balance transfer card, consider it only if you can afford to pay off your debt within the promotional period and you have enough discipline to stick to your repayment plan.
- You're taking steps to tackle overspending. If you've gotten on a budget and worked to spend within your means, you're less likely to repeat your mistakes after consolidation.
Consider alternatives to debt consolidation if:
- You want to pay off lower-interest debt. If you have another type of debt you want to pay off, such as a mortgage, auto loan or student loan, look into refinancing that debt for better terms instead of including it in your consolidation.
- You have bad credit. You'll have a difficult time getting approved for a lower interest rate than what you're currently paying unless your credit is in good shape.
- You're looking for a temporary fix. Debt consolidation can provide some relief on interest charges and monthly payments. However, if you don't have a long-term plan to eliminate debt, you could just be delaying an inevitable reckoning.
- You haven't addressed your overspending. Consolidating debt doesn't fix the underlying problem behind your high credit card balances. If there's a possibility that you'll rack up more debt on the original cards, figure that out before proceeding.
Alternatives to Debt Consolidation
Debt consolidation can make getting out of debt more efficient or affordable, but it isn't your only option. Before you decide, weigh these alternatives.
- DIY debt payoff strategies: You may be able to tackle your debt on your own using the debt avalanche or debt snowball methods. These strategies have you make the minimum payment on each of your debts while applying extra funds toward either your highest-interest balance or your smallest balance first. This can help you save money or knock balances out quicker.
- Credit counseling: A nonprofit credit counselor can help you review your financial situation and assess a practical path out of debt. Credit counseling can be a big help if you're feeling overwhelmed by debt, are struggling to make payments or need help coming up with a budget that supports your goals.
- Debt management plan: In some cases, a credit counselor might suggest a debt management plan (DMP). DMPs are a structured repayment strategy designed to help you wipe out your credit cards and certain other debts. Should you and your counselor decide it's a worthwhile option, your counselor would set up the plan, negotiating lower interest rates and fixed monthly payments. Once enrolled, instead of making multiple payments a month, you would make one payment to your credit counseling agency. The counselor then sends funds directly to your creditors.
- Debt settlement: Debt settlement is a risky way to attempt to get out of debt. It typically involves letting your accounts become past due with the goal of negotiating with your creditors to pay less than you owe. See more on how it compares to debt consolidation below.
- Bankruptcy: Bankruptcy is a last-resort option when you're buried deep in debts you cannot repay. It's a long, stressful legal process with long-lasting impacts on your creditand finances. In some cases, however, it may be the most practical path forward. Meeting with a credit counselor is the first step in determining whether it's an option.
Debt Consolidation vs. Debt Settlement
Debt settlement is another way to tackle an unwieldy debt burden, but it's not the same as debt consolidation, and it comes with several risks. With debt settlement, you negotiate with your creditors to pay less than what you owe. You can try doing it yourself, or you can hire a debt settlement company to do it for a fee.
| Debt Consolidation | Debt Settlement |
|---|---|
| Involves paying off one or more existing debts with a new loan or credit card | Involves negotiating with creditors to pay less than what you owe |
| Typically requires good or excellent credit | No minimum credit score requirement |
| May slightly damage your credit at first, but can help build credit over time | Can cause long-lasting damage to your credit |
| Best for people looking to save on interest and pay down debt faster | Best for people significantly behind on debt payments |
Because your payment history is the most important factor in your FICO® Score, settling your debt for less than what you owe can have major negative consequences for your credit scores. On top of that, debt settlement companies typically have you stop making payments on your debts while saving up for the settlement amount, which can cause your credit scores to plummet even further.
In contrast, debt consolidation can have an impact on your credit when you apply and open a new loan or credit card. But as long as you make your payments on time, there likely won't be any long-term damage. In fact, if it helps you avoid late payments and you pay the loan as agreed, debt consolidation can help improve your credit.
Learn more: What's the Difference Between Debt Consolidation and Debt Settlement?
Review Your Credit Before Applying for Debt Consolidation
In many cases, you can get prequalified for a personal loan or a credit card. But to make sure you have all the information you need to evaluate your options, check your FICO® Score and credit report for free with Experian. You'll get insights into where you stand now and areas where you can improve your credit.
Once you're ready to move forward, you should start gathering information on the offers you might qualify for. Experian's loan comparison platform lets you compare debt consolidation loans from multiple lenders based on your credit profile. This lets you conveniently browse potential fits in one place.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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