What is Debt Consolidation?

Understanding this key debt relief process so you can the right choices for your finances.

In general, letting outstanding debt linger in your financial portfolio is both risky and costly. Each month that passes without paying off a debt is another month of accrued interest charges that you have to pay. In addition, the monthly bills for debt tend to stretch your budget thin, putting you one emergency or unexpected expense away from potential financial distress.

That’s what makes financial processes like debt consolidation so valuable, because it can help you avoid challenging situations with debt – or it allows you to get out of a challenging situation with as little hassle as possible. The information below is designed to help you understand what debt consolidation is and how it can help you regain and maintain financial control. If you have any questions or want to explore options for consolidation, call us at or complete an online application to request a free debt and budget analysis from a certified credit counselor.

Basic definition of debt consolidation

Consolidate your debt

In the simplest terms possible, debt consolidation refers to any financial process that rolls multiple unpaid debts into a single monthly payment. So instead of paying five bills, each with a different high interest rate, you pay just one bill that covers the payments for all of those debts.

There are two main goals with any debt consolidation plan:

  1. To simplify your bill payment schedule so you’re not juggling multiple payments per month.
  2. To reduce the interest rate applied to your debt so you can pay it off faster

Debt consolidation also usually lowers your monthly payments, although not in all cases. This is often a pleasant and much-needed side effect of achieving the first two goals.

Paying off debt faster even though you pay less

It may sound a little counterintuitive – that you can somehow pay less each month and still get out of debt faster than you would have been able to prior to consolidation.

This works out because of the second goal: reducing interest. By reducing the interest rate applied to your consolidated debt, more of each payment you make goes towards reducing the actual balance owed rather than paying off accrued interest charges. So even though you’re paying less in total, more of that payment is going to reduce the principal (the actual debt owed) rather than the accrued interest charges.

So if you have $5,000 in credit card debt spread out over five different cards at an average APR of 18% then the total monthly payments you make would be around $125, but roughly 2/3 of each payment made is getting eaten up by interest charges. You pay, $125 but $75 goes to cover interest charges – meaning you only reduce your debt by $50 even though you paid $125.

Additionally, it would take 273 payments to eliminate the debt in full on a minimum payment schedule. That means it would take over 22 years to eliminate your debt using traditional minimum payments. This is why minimum payments are typically considered one of the least efficient ways to pay off debt.

Now let’s look at the same debt in consolidation. If you consolidate that $5,000 using a debt consolidation loan at 5% APR for 60 months, then your monthly payment would be reduced to around $95. However, since the interest rate is so much lower, only about $20 goes to cover interest charges, while the other $75 goes to paying off principal.

As you can see, even though your monthly payment is lower in this second scenario, you’re actually paying off more principal debt each month that you do in the first scenario. So in 60 payments (5 years), you’ve eliminated the debt completely. It’s a faster way to eliminate debt because it’s more efficient.

What can you consolidate?

As a general rule of thumb, debt consolidation usually requires you to consolidate similar types of debts. So you can consolidate federal student loans together with a Direct Consolidation Loan and you can consolidate credit card debts with a debt management program, but there is really not an option that lets you consolidate the credit cards together with the student loans. Basically likes must be kept with likes when it comes to consolidation.

So let’s look at different options for consolidation and review what types of debt each can consolidate:

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

"We are really proud to recommend Consolidated Credit" Kathleen Cannon, President & CEO of United Way of Broward County. Consolidated Credit Counseling Services, Inc. is pleased to announce our partnership with the United Way as a United Way Chairman’s Circle Organization.

All Consolidated Credit counselors are certified personal financial counselors (CFC) We've helped 5 million people get out of debt! Call us today and see what we can do for you.

Consolidated Credit is honored to receive the 2012 Excellence in Financial Literacy Education (EIFLE) Nonprofit Organization of the Year award. The EIFLE awards acknowledge innovation, dedication and the commitment of organizations that support financial literacy education worldwide. See what Consolidated Credit can do for you.

Consolidated Credit is honored to receive the 2012 Excellence in Financial Literacy Education (EIFLE) Nonprofit Organization of the Year award. The EIFLE awards acknowledge innovation, dedication and the commitment of organizations that support financial literacy education worldwide. See what Consolidated Credit can do for you.

The National Industry Standards for Homeownership Education and Counseling are a set of guidelines for quality homeownership and counseling services. Industry professionals who adopt these standards can be trusted to provide consistent, high quality advice.
Click here to learn more.

Consolidated Credit Consulting Services, Inc. has been verified as the owner or operator of the Web site located at www.consolidatedcredit.org. Official records confirm Consolidated Credit Consulting Services, Inc. as a valid business. Call us today and see what we can do for you.

Consolidated Credit is a Certified ISO 9001 company, as verified through Bureau Veritas Certification.

Time tested and customer trusted. Consolidated Credit Counseling Services has been a BBB Accredited Business since 1998 and has a current A+ rating. Call us today and see what we can do for you.

View the Consolidatedcredit.org review status

Time tested and customer trusted. Consolidated Credit Counseling Services has been a BBB Accredited Business since 1998 and has a current A+ rating. Call us today and see what we can do for you.

View the Consolidatedcredit.org review status

Consolidated Credit is proud to be an ANAB accredited member. Accreditation by a recognized and respected body such as ANAB ensures the impartiality and competence of our company. To see what we can do for you, give us a call.

U.S. Department of Housing and Urban Development - HUD's mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. Consolidated Credit is proud to be a member of HUD and also part of the Hope Now Alliance.

You can save!

With this amount of debt, you'd pay around $xx.xx on a DMP.

FREE Debt Consultation