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What Is Debt Consolidation?

When you’re stuck in the deep end of credit card debt, student loan payments, car loans and medical bills, it’s hard to keep your head above water. I know cause I’ve been there myself.

But if you’re hoping consolidating your debt will bail you out . . . trust me, it won’t. I’m here to tell you the truth (the whole truth and nothing but the truth) about debt consolidation before you head down that road—and how to get out of debt for good.

What Is Debt Consolidation?

Debt consolidation is the process of combining several debts into one monthly payment for a streamlined payoff plan.

When you consolidate your debts, you still have the same amount of debt you started with. But instead of keeping up with multiple loans, you only have to make one payment. Don’t get too excited, though . . . this isn’t as good as it sounds.

Debt consolidation is also different from debt settlement. With debt consolidation, you combine your loans into one payment. With debt settlement, you pay someone else to negotiate a lump-sum payment to your creditors for less than you owe. (P.S. Both debt consolidation and debt settlement can scam you out of thousands of dollars.)

What Are the Types of Debt Consolidation?

Debt consolidation goes by several different names—some more sneaky than others. But no matter how you spin them, these options won’t bring down your debt balance. In fact, you usually end up paying more when all’s said and done. So, here are a few types to look out for:

Debt Consolidation Loan

A debt consolidation loan is a type of personal loan that can be used to pay down your other debts. These loans usually come from a bank or a peer-to-peer lender (aka social lending or crowd lending from an individual or group).

There are two kinds of debt consolidation loans: secured and unsecured. If you take out a secured loan to consolidate your debt, you have to put up an asset (like your car or your house) as collateral. Wait, your house? That’s a terrible idea—because then your new lender can come after your home if you miss payments. Hard pass.

If you take out an unsecured loan, you aren’t offering up your stuff as collateral. But the lender knows this is a riskier deal for them, so they charge a higher interest rate to cover their backs. Either way, a debt consolidation loan is more about helping debt companies make money than it is about helping you pay off your debt.

Other Types of Debt Consolidation

Credit Card Balance Transfer: This is when you move your debts from all your credit cards to one new one. This method usually comes with transfer fees and an interest rate that starts off low but shoots straight up after a certain period or if you miss a payment.

And let’s be real: If you’re struggling with credit card debt, moving your debt to a new card doesn’t do you any favors. You still have to do the hard work of paying it off—and the even harder work of changing your behavior around borrowing money.

Home Equity Line of Credit (HELOC): This is a secured loan that lets you borrow cash against the current value of your home, using the equity you’ve built up as collateral. You’re basically giving up the portion of your home you actually own and trading it in for more debt so you can “pay off” your other debts.

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But again, the debt isn’t actually paid off. It’s just moved to a way more dangerous place—your home. And that means the bank can take your house if you don’t pay up! HELOCs are a trap. Don’t take the bait!

Student Loan Consolidation: This is the only type of consolidation I would ever recommend—but only on a case-by-case basis (more on that in a minute).

Type of Debt


What It Is

Should You Do It?

Debt Consolidation Loan

A personal loan that combines multiple debts into one monthly payment

No. These come with an extended payoff date, fees and often higher interest rates. Sometimes you have to put your car or home up as collateral. Gag.

Credit Card Balance Transfer

A new credit card that combines all your other credit card debt into one monthly payment

No. This method comes with fees and often a huge spike in interest—and it gives you one more credit card to worry about.

Home Equity Line of Credit (HELOC)

A secured loan where you borrow against the equity in your house to pay off your debts

No. You’ll be giving up the portion of your home you actually own and trading it for more debt. Plus, your home becomes collateral and can be taken away. Again—gag.

Student Loan Consolidation

A loan that rolls your federal student loans into one lump payment

Maybe. If you’ve got multiple federal student loans, especially with variable interest rates, consolidating can help you focus on one fixed payment.

How Does Debt Consolidation Work?

When a person consolidates their debt, they get one big loan to cover all their smaller loans. But that one loan often comes with added fees, a longer repayment period and a higher interest rate! (See, I told you it was too good to be true.)

The debt consolidation process depends on what kind of loan you get, but it usually goes something like this:

  1. You fill out an application.
  2. The lender checks your credit and debt-to-income ratio.
  3. You provide a ton of documentation about your debt, finances, identity, mortgage and more.
  4. The lender decides whether to give you the loan or not.
  5. If you’re approved for the loan, the lender will pay off your debts or give you the money or a line of credit to go pay off your debts yourself. Either way, you’re still in debt—just to a new lender. (Are you starting to see how this doesn’t really help you?)

Is Debt Consolidation a Good Idea?

How can I put this delicately . . . NO! Unless you’re wanting to consolidate your student loans. But student loan consolidation isn’t the best choice for everyone.

First of all, only federal student loans can be consolidated through the Department of Education. (If you’ve got private student loans, you could look into refinancing, as long as you follow our recommendations for doing that wisely.)

And while it may be free to consolidate your student loans, you can’t get a lower interest rate than you already have. But if one of your loans has a variable interest rate, it might be worth consolidating to trade it for a fixed rate. It’s more a question of what will motivate you to pay off your loans faster. But again, consolidating won’t do you much good. The bigger focus should be on having a good game plan for paying off your student loans.

Any other kind of debt consolidation, though—steer clear.

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5 Reasons Debt Consolidation Is Not a Good Idea

1. When you consolidate your loans, there’s no guarantee your interest rate will be lower.

The lender or creditor sets your new interest rate based on your past payment behavior and credit score. So, instead of getting that lower interest rate you were hoping for, you could get stuck with a higher interest rate than you had before you consolidated! And higher interest on one big pile of debt adds up even faster.

2. Lower interest rates don’t always stay low.

Even if you qualify for a loan with a low interest rate, there’s no guarantee your rate will stay low (unless you get a fixed rate). That lower interest rate you get at the beginning is usually just a trap (I mean, a promotion) and only applies for a short period of time—and it will eventually go up. You don’t even need to do the math to know that’s going to cost you more.

3. Consolidating your loans means you’ll be in debt longer.

In almost every case of debt consolidation, lower payments mean the term of your loan gets dragged out longer than the seasons of Grey’s Anatomy (and Lord, that’s a long time). Extended terms equal extended payments, which means you’ll pay way more in the long run. Um, no, thank you. Your goal shouldn’t be to have a lower payment—your goal should be to get out of debt ASAP!

4. Debt consolidation doesn’t mean debt elimination.

If debt consolidation meant debt elimination, I wouldn’t be warning you to stay away. I’d tell you to jump on board! But sadly, debt consolidation really means you’re just moving your debt around, not actually getting rid of it. That’s like stuffing all your junk into one room—it’s all in one place, but you’ve still got to deal with it at some point.

And when you shove it in a closet, it frees up space, so you think you have less. Then you go out and buy more stuff you don’t need. That’s exactly what happens with consolidation! You trick yourself into thinking you have less debt, which gives some folks permission to go out and get in even more debt.

5. Your behavior with money doesn’t change.

Most of the time, after someone consolidates their debt, the pile of debt just continues to grow, instead of shrink. Why? Because they don’t have a game plan for sticking to a budget and spending less than they make. In other words, they haven’t established good money habits for staying out of debt.

Debt consolidation doesn’t help you deal with the root of your money problems—it only puts a band aid on the symptom. Take it from someone who’s paid off way more than their share of debt (with interest). It’s so worth it to do the work to change your beliefs and habits around money. So once your debt is gone, it’s gone for good!

Does Debt Consolidation Hurt Your Credit Score?

Yes, it does. And while I’m not a fan of credit scores, you should know exactly what happens if you consolidate your debt. The way credit scores are set up, you get “rewarded” for keeping debt around for the long haul and paying on it consistently over time. But when you consolidate and roll over your old debts into a new debt, you hurt that consistency in the eyes of “the great FICO.” So, yes, your credit score will probably drop some points if you consolidate your debt.

But please believe I don’t give a rip about credit. In my house, we just buy things we can afford with real money. FICO who?

What’s the Fastest Way to Get Out of Debt?

So, if debt consolidation won’t help you get rid of your debt, what will? Ooh, I’m so glad you asked!

The debt snowball method is hands down the best (and fastest) way to get out of debt. Unlike debt consolidation, which just puts your debt into one pile, the debt snowball method helps you actually pay off all your debts. Every. Last. One. It’s the method my husband and I used to pay off over $460,000 of debt!

Here’s how the debt snowball works:

  1. List all your debts smallest to largest (no matter the interest rate). Pay minimum payments on everything but the smallest debt—you’re going to throw everything you can at this one to pay it off as quickly as possible. (How? Cut back your spending, get on a budgetmake extra money, etc.)
  2. Once that smallest debt is gone, take all the money you were paying toward it and apply it to the second-smallest debt. Continue making minimum payments on the rest.
  3. Keep attacking each debt this way until every single one is gone. It’s like a snowball rolling down a hill at top speed—nothing can stop the momentum, and nothing can stop you!

And when I say gone, I mean she’s gone. Not “settled” or “balanced” (which are two super misleading words debt companies love to throw around). And I definitely don’t mean your debt is just under a new name with a new interest rate. I’m talking 1-800-Pay-Me has stopped calling and you don’t owe anything to anyone! Now that sounds nice, right?

Ditch Your Debt for Good

Working the debt snowball is a great first step. But if you really want to change the way you manage your money, you’ve got to change the person in the mirror (that’s you!). And I know that can be overwhelming if you don't know where to start. That's why you need a step-by-step plan.

Financial Peace University (FPU) is a nine-lesson course that will teach you how to pay off debt, save for emergencies, and even save for your future. Nearly 10 million people have learned what it takes to win with money . . . and now it’s your turn!

Instead of sweeping your debt under the rug, it’s time to sweep it right out of your life. Check out FPU today!

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Jade Warshaw

About the author

Jade Warshaw

Jade Warshaw is a personal finance coach, bestselling author of Money’s Not a Math Problem, and regular co-host on The Ramsey Show, the second-largest talk radio show in America. Jade and her husband paid off nearly half a million dollars of debt, and now she’s a six-figure debt elimination expert who uses her journey to help others get out of debt and take control of their money. She’s appeared on CNBC, Fox News and Cheddar News and been featured in Fortune and POLITICO magazines. Through her social content, recent book, syndicated columns and speaking events, Jade is on a mission to change the typical American money mindset. Learn More.

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