Personal Finance
April 28, 2015

What Is Debt Consolidation?

Written By Jack Ryder
Last updated December 2, 2019

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Simple. Thrifty. Living.

The word “consolidate” means to gather several things together into one unified whole. When a person consolidates their debts, they put them all together into one single debt, so there is only one single payment to make each month. Here is a brief overview of how debt consolidation works, together with the pros and cons of choosing this option.

Zero percent credit cards: Some people choose the do-it-yourself route of opening a new credit card and taking advantage of its low-interest introductory offer to pay off all their other loans. This choice can be risky, since the interest rate on the new card may be very high after the initial zero-interest period, but if you can pay off your debt during the intro period (usually 12-18 months), then it’s a great idea. Here are some of the best 0% intro APR cards.

These types of cards tend to require a high credit score, so if your credit isn’t the best, you can either try raising your score — by yourself or through one of the reputable credit repair services — or you can use one of these other methods.

Debt consolidation loans: These are loans given by banks, which the borrower uses to pay off all other debts. In general, such loans are not available to borrowers with poor credit unless the borrower secures the loan by using their house as collateral. This is rarely a good choice, since if the borrower encounters problems with making payments, the bank has the right to collect its money by taking and selling the borrower’s home. Here are some of the best debt consolidation loan services.

Debt management programs: If a person contacts a consumer credit counseling organization and enrolls in a debt management program, the program will assist the borrower with setting a realistic budget. Part of the services that such programs offer is to contact all creditors and arrange a repayment plan that the person can afford. Then the person makes one payment each month to the credit counselor, and the credit counselor makes the individual loan payments on behalf of the customer. Some of the top debt consolidation programs have debt management programs.

People who have trouble keeping track of payment deadlines may find it helpful to have one simple bill to pay each month. For someone who is not skilled at keeping to a budget, working with a credit counseling agency is an excellent way to learn new money management skills. In addition to offering debt consolidation, the credit counselor will teach the customer how to spend wisely and avoid falling into future debt problems. Legitimate credit counseling services are free for customers to use, but there are many predatory imitators which only pretend to offer services but in fact simply take a big fee and don’t provide real help.

It’s almost never a good idea to use one’s house as collateral for a new bank loan to pay off old debts. Before anyone even considers this option, they should speak with a reputable financial adviser or even a bankruptcy lawyer. There are lesser risks involved with opening a new credit card to pay off other loans. These risks largely center on affordability: a person must be able to stop making new credit card purchases, and must be able to pay more than the minimum payment on the new card, or else they risk many years of very high interest rates. Using a credit counseling agency carries the fewest risks, although this choice can have a temporary negative effect on the customer’s credit rating.

Debt consolidation is sometimes a good option, but it must be entered into very carefully and with full knowledge of the costs and benefits. It’s also important to avoid the numerous scams which prey on worried borrowers, and find a legitimate credit counselor or financial adviser in order to discuss the best options.

About the Author

Jack Ryder

Jack Ryder has been working as a reporter and writer in the personal finance space for many years. He enjoys breaking down complicated finance information into easy-to-read articles, so his readers can better navigate their financial lives. He is currently the Editor of the Credit Repair and Debt Relief categories, although enjoys writing about all things finance. Jack has had articles appear in publications from the Huffington Post to Business Insider. You can contact Jack at

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