7 Things to Know About Debt Consolidation

There’s plenty to keep track of in our financial lives — budgeting, saving, investing and taxes, just to name a few. Paying down debt can be one of the most stressful, especially when you’re dealing with multiple lenders, payment plans and deadlines.

Debt consolidation, which generally means combining multiple debts into one new loan or credit product , can make handling this financial task a bit more manageable. The trick is to look for a new loan or offer with a lower interest rate than your current debts (and to compare total cost after fees, not just the advertised rate), which can help you save money and (ideally) pay your debt off faster.

Debt consolidation is different from debt settlement, which involves negotiating to pay less than you owe and can significantly damage your credit.

While debt consolidation can be advantageous, it doesn’t make sense for everyone. Here are seven things to know before you consolidate your debt.

Key takeaways

• Consolidation can simplify payments and lower your interest rate, but it won’t reduce what you owe.
• The best option is the one with the lowest total cost (interest rate, and all fees, typically provided to you as an annual percentage rate, or APR) that you can realistically pay off on time.
• If you use home equity, you’re putting your home at risk if you can’t repay.
• If you consolidate but keep spending, you can end up deeper in debt.

1. Consolidation won’t decrease your debt

Consolidating your debt can offer some nice benefits, like having fewer bills to manage, lowering your monthly payments, potentially improving your credit and even the possibility of saving money on interest. But one thing consolidation definitely won’t do is forgive or lower your overall debt.

When you consolidate, you’re left with one loan. But that one loan will be the size of all the debts you bundled together, and you still have to pay the whole thing off. If you do your research when shopping around for a new loan, you may save yourself money on interest which could help you pay off the debt faster. Or you may be able to reduce how much you’re spending on debt bills each month by opting for a loan that mixes a lower interest rate with a longer repayment term. Just keep in mind: a longer term can lower your monthly payment but raise your total interest cost. But no matter what, you won’t be reducing the balance you owe.

2. You typically need at least a fair credit score

Lenders who offer debt consolidation want to have confidence that you’re going to make good on the new, consolidated loan. One way they do this is by checking your credit score.

The requirements for minimum credit scores can vary widely between different products and lenders, which means there’s no way to nail down exactly what you’ll need your score to be without doing your research. But most lenders won’t approve loans for borrowers with scores that are considered less than “fair” — 580 to 669 if you’re using the FICO score, which is the most commonly used. A “good” score is between 670 and 739, which is within the typical “good” range many lenders prefer — and as of September 2025, Experian data put the average U.S. FICO score at 713.

The higher your credit score, the more likely you are to get a lower interest rate. So while you may be able to get a debt consolidation loan with a poor credit score, you’ll probably be offered a high interest rate. If that’s the case, consolidating your debt could do more harm than good. If you’re shopping rates, look for lenders that offer prequalification (often a soft credit check) before you submit a full application.

3. There are three main debt consolidation options

There are three main debt consolidation options. The first is a home equity line of credit (HELOC) or home equity loan, which allows homeowners to borrow against their home, which can help them get a lower interest rate than they would with unsecured loans. These loans can come in the form of a lump sum of cash in the case of a home equity loan or as a revolving line of credit via a HELOC. Home equity loans typically have fixed rates, while HELOCs often come with variable rates, though some lenders offer fixed-rate options designed for debt consolidation. This strategy typically makes the most sense for homeowners who have enough equity to stay within a lender’s combined loan-to-value (CLTV) limit (often around 80% to 90%, depending on the lender) and are willing to put their home on the line.

The second debt consolidation option is a balance transfer credit card, which allows people with credit card debt to swap the typical APR — often around 20% or higher (as of November 2025, the Federal Reserve’s average credit card interest rate at commercial banks was 20.97%) — for a rate as low as 0% for a certain period of time. If you have a small enough balance that you will be able to pay it off before the APR jumps and the discipline to avoid charging additional debt onto the new card, opening this type of credit card could make sense. Keep in mind that the best 0% intro APR offers typically go to borrowers with good or excellent credit, and balance transfers usually come with a fee.

The third option is a personal loan issued by a bank, credit union or online lender. These loans tend to have higher rates than those with collateral, like home equity loans, but if you’ve got a solid credit score you may be able to score a lower rate than you’re currently paying. This move usually makes most sense for people who can’t or don’t want to tap their home equity and have at least a fair credit score. (For context: as of November 2025, the Federal Reserve’s average 24-month personal loan rate at commercial banks was 11.65%.)

Note: If most of your debt is federal student loans, “student loan consolidation” is a separate process with its own pros and cons, and it won’t combine credit card or medical debt.

4. Terms vary

Not all debt consolidation offers come with the same terms. In fact, the terms can vary a lot — and it’s important to fully understand what they mean for you before you commit.

Take credit card balance transfers. If you’re offered an APR even as low as 0%, it won’t last forever. If that APR jumps to 25% after the first year and you still owe the lender money, the terms may make that a bad option for you.

Be sure to read your agreement carefully so you understand how long you have to pay the loan back, and what happens if you choose to pay it back earlier. At minimum, double-check:

• What the APR is now (and whether it’s fixed or variable)

• How long any promotional APR lasts (if applicable)

• What the APR will be after the promo ends

• All upfront fees (origination, balance transfer, closing costs)

• Late fees and penalty APR triggers

• Whether there’s a prepayment penalty (some loans have one, many don’t)

5. There can be risks

Consolidating your debt could be the smart move, but it’s not always risk-free. If you receive a home equity loan or HELOC, for instance, you’re using your home as collateral. That means that if you’re not able to make all your payments and you default on the loan, your house could go into foreclosure.

Another risk is that if you don’t have a good credit score, you could receive an offer with an interest rate that’s not lower than what you currently pay. When you factor in the added expenses of consolidating your debt, taking out a new loan may put you in a worse position than paying off the debt you have.

Debt consolidation also doesn’t solve any of the issues that may be at the crux of the debt — and it could even exacerbate it if you now have more credit available. In other words, if you tend to overspend, debt consolidation won’t keep you from racking up debt again. If that’s the case, you may want to focus on budgeting and limiting your spending as you pay down your existing debt. If, on the other hand, you’re struggling to make your minimum payments due to a financial hardship (like a job loss, divorce or medical emergency), you may want to consider other options, like negotiating with your creditors or working with a debt relief company.

6. You’ll have to pay fees

When you’re considering debt consolidation, make sure you factor in the cost of fees. These fees will vary by lender and the type of loan.

Balance transfer credit cards will often charge an initial fee of between 3% and 5%. (In the second half of 2024 —the most recent data available— the CFPB reported an average balance transfer fee of 4.3% among the 25 largest issuers, with an average minimum fee of $5.51.) Meanwhile, closing costs on home equity loans can range from 2% to 5% while origination fees for a new debt consolidation loan can be as high as 10% of the loan. HELOCs may also come with fees like application, origination, appraisal, title/closing costs, annual fees or early-termination fees, depending on the lender.

Check for prepayment, late and annual fees as well. Regardless of which option you choose, the best debt consolidation companies will have very transparent fees so you don’t have any surprise charges.

You’ll also want to know how long it takes to get your loan proceeds and if the lender offers any other services to make the borrowing process go smoothly. Some lenders can take care of paying off your existing accounts directly, with some even offering interest rate discounts for using that option.

7. Debt consolidation can impact your credit

Debt consolidation can impact your credit score — for better and for worse. The strategy involves taking out a new loan, which requires potential lenders to take a close look at your credit report. This review is known as a hard inquiry, and it can lower your credit score by about five points or less, according to FICO. It may also decrease the average age of your overall accounts, which can negatively impact your score. Your score may also be affected if you close existing accounts after you pay them off with a debt consolidation product.

But in the long run, debt consolidation could help your score, too. That’s especially the case if you’ve struggled to make your monthly payments and debt consolidation will help you turn that around, since missing payments can weigh significantly on your score. Consolidation could also lower what’s called your credit utilization ratio, which is the amount of the credit you’re using compared to what’s available to you. Replacing multiple debts with one new one could lower your credit utilization ratio, which makes you less risky to lenders. Just make sure you don’t run balances back up on the credit you paid off, or you can end up with both the consolidation loan and new revolving debt.

FAQs

Is debt consolidation worth it?

It can be if you qualify for a lower APR (after fees) or a payment you can realistically afford without stretching the payoff so long that total interest balloons.

Does debt consolidation hurt your credit?

It can cause a small, temporary dip from the hard inquiry and a newer average account age, but paying on time and reducing revolving balances can help over time.

Is debt consolidation the same as debt settlement?

No. Consolidation focuses on simplifying repayment (and ideally lowering your APR). Settlement involves negotiating to pay less than you owe and can also affect your credit.

This story was originally published February 26, 2025 at 8:35 AM.