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What Is Debt Consolidation, And Is It A Good Idea?

3-Minute ReadPUBLISHED: June 06, 2022 | UPDATED: August 02, 2022


Having multiple debts at the same time can be overwhelming as you juggle various monthly payments and due dates, making it hard to budget your monthly expenses. This happens most often with high-interest credit card debt, and it’s why some borrowers turn to debt consolidation to simplify their debt repayment.

Up next, we’ll break down how debt consolidation works, look at different types of debt consolidation, and explore when consolidating your debt is a good idea.

How Does Debt Consolidation Work?

When you consolidate debt, you combine multiple payments, such as medical bills or credit card debt, into a single payment. Debt consolidation, also known as bill or credit consolidation, can make it easier for you to manage multiple debts and give you the opportunity to secure lower interest rates and lower monthly payments.

Debt Settlement Vs. Consolidation

Debt settlement differs from debt consolidation in that it involves negotiation. Some people may hire a company to negotiate with their creditors and convince these creditors to settle debts for less than the original amount owed.

With debt settlement, you typically deposit money every month into a special account. Once your balance reaches a certain amount, the debt settlement company will reach out to your creditors and negotiate a lower settlement amount.

The downsides to debt settlement are that you’ll have to make monthly payments, your credit score will take a hit, and the debt settlement company will charge you a fee that’ll likely be 15% to 25% of your total enrolled debt.

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Types Of Debt Consolidation

Numerous debt consolidation strategies are available to borrowers who want to simplify their debt repayments. Since each strategy has its pros and cons, it’s a good idea to review your options and choose the one that best fits your budget and lifestyle needs.

Debt Consolidation Loans (Personal Loans)

You can use a debt consolidation loan to pay off outstanding debt and essentially replace it with a single monthly payment. Ideally, your new loan will have a lower interest rate than your previous debts, potentially saving you money in the long run, too.

Debt consolidation loans are often personal loans from a traditional bank, credit union or online lender. It’s important to note, though, that personal loans often require a certain credit score for you to be eligible for lower interest rates, and you’ll likely need a good or excellent score to get the rate you want.

The personal loan application process is relatively straightforward, and once approved, you could receive your funds in 1 – 7 business days. Some lending platforms, like Rocket Loans℠, can even offer same-day funding to certain applicants.*

Home Equity Loans And HELOCs

Home equity loans and home equity lines of credit (HELOCs) are both available for consolidating debt, but both can carry significant risks for borrowers. To secure a home equity loan, a borrower must borrow against the equity in their home, making the home itself collateral. If a borrower fails to make their payments or defaults on the loan, the lender can take the home through foreclosure.

It’s a similar process with a HELOC, but instead of a loan, the borrower gains a credit line they can borrow from and repay over time. Again, your house is on the line if you fail to make on-time payments.

Balance Transfer Credit Cards

When you use a balance transfer card, you're essentially transferring your existing credit card balance debts onto a new credit card with a promotional interest rate that can be as low as 0%. Keep in mind, however, that this method has some drawbacks.

If you go this route, you’ll likely have to pay a balance transfer fee, which will be 2% to 5% of your total balance. Also, after the 12 – 18 month promotional period ends, you’ll be left with a much higher interest rate that may rise as much as 14% to 26%. Compared to a personal loan, a balance transfer may offer more risk than reward.

Student Loan Consolidation

Consolidation for student loan debt involves combining multiple federal loans into a single loan backed by the government, potentially lowering interest rates and easing the repayment process for many. The process is similar to student loan refinancing, which combines multiple federal or private loans into a single private loan.

When Is It A Good Idea To Consolidate Credit Card Debt?

Debt consolidation can be a good idea if you feel overwhelmed by multiple debts and can simplify them into one monthly payment with a lower interest rate. It can also be a wise move if you can qualify for the 0% interest balance transfer card and feel confident you can pay off your debt during the promotional period.

Consider also your financial situation. Debt consolidation could be the way to go if any of the following is true:

  • Your debt-to-income (DTI) ratio is under 36%
  • Your credit score has improved and you can qualify for a better interest rate
  • You have enough cash flow to keep up with your loan payments
  • You can comfortably pay off a loan over a certain period of time

Debt consolidation doesn’t address the initial cause of your debt or make it magically disappear, but it’s a simple financing tool that can help you manage your debt and its payments. Therefore, if your debt is the result of careless spending, you can’t count on debt consolidation to improve your financial situation.

Also, if you don’t have too much debt and believe you can pay it off fairly quickly, debt consolidation may not be worth it.

Pros And Cons Of Debt Consolidation

Debt consolidation comes with its fair share of benefits and drawbacks. Take a look below at some pros and cons of debt consolidation.


  • Combines multiple debts into a single monthly payment
  • Can potentially lower a borrower’s interest rate
  • Can extend a borrower’s loan term and give them more time to pay off the loan


  • Lenders can charge balance transfer or loan origination fees.
  • Borrowers with poor credit may not qualify for lower interest rates.
  • Debt could return if the borrower doesn’t improve their spending habits.

Should I Consolidate My Debt?

Debt consolidation has the potential to affect your credit score, but your score can suffer more when you don’t deal with your initial debt. If you make on-time payments every month, eliminate or reduce your balances and change your spending habits so that you don’t take on more debt, debt consolidation could put you on your way to becoming debt-free.

Check your credit report and see if you qualify for lower interest rates. Unless you can get a lower rate than your current one, debt consolidation may do more harm than good to your credit score. 

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Final Thoughts

Debt consolidation can improve your loan repayment by converting everything into one payment and possibly saving you money in interest with a lower rate. This strategy isn’t for everyone, though, so make sure to look over your financial situation before committing to a new loan.

If you believe you can benefit from debt consolidation, apply for an online personal loan today with Rocket Loans.

*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.

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